Tax Reform Proposal Has Significant Impact on Employee Benefit PlansPublications - Client Alert | February 28, 2014
On Wednesday the Chairman of the Ways and Means Committee, Representative Dave Camp (R-MI) released a draft tax reform plan called — the Tax Reform Act of 2014.
Tax reform is highly unlikely to be enacted this year. However, this reform plan is significant for several reasons. First, this draft is the first comprehensive tax reform plan issued by a tax-writing committee in this Congress. Second, this plan will likely serve as a basis for future tax reform plans. Third, the proposal contains many provisions that would raise revenue, and these provisions may be cherry-picked to offset future government spending or deficit reduction needs.
The Tax Reform Act of 2014 would impact employee benefit plans as follows.
Pensions and Retirement
Pre-tax salary deferrals to 401(k), 403(b), and governmental 457(b) plans would be limited in the case of plans sponsored by large employers (generally employers with more than 100 employees). Under present law, up to $17,500 ($23,000 for employees 50 and older) may be deferred on a pre-tax basis. Under the reform proposal, only half of the contribution limit could be deferred on a pre-tax basis; the remaining amounts would be required to be deferred as after-tax (Roth) contributions. The after-tax contributions would be taxable in the year of deferral, but generally would not be taxable in later years. Employers would be required to allow these after-tax contributions.
The Tax Reform Act of 2014 would also freeze the contribution limits for tax-qualified retirement plans at 2014 levels until 2024.
There are numerous other changes to the tax rules for retirement savings, including the elimination of income limits on contributions to Roth IRAs, elimination of future contributions to traditional IRAs, harmonization of tax limits and penalties across 401(k), 403(b), and governmental 457(b) plans, repeal of the exclusion for net unrealized appreciation of employer securities distributed from a retirement plan, changes to the required minimum distribution rules, and a prohibition on the establishment of new SEP and SIMPLE 401(k) plans. The proposal would also impose a 10% tax on employer contributions to defined contribution retirement plans for individuals making over $400,000 or couples making over $450,000.
The Tax Reform Act of 2014 would repeal the Affordable Care Act limit on reimbursements of expenses for over-the-counter medications from health FSAs, HRAs, and HSAs. The Act would also impose a 10% tax on employer contributions to health plans for individuals making over $400,000 or couples making over $450,000.
The qualified transportation parking benefit would be set permanently at $250 per month and the qualified transportation transit benefit would be set permanently at $130, with no future adjustments for inflation for either benefit. The qualified transportation bicycle commuting fringe benefit would be repealed in its entirety. Additionally, employers would no longer be able to deduct the costs of qualified transportation fringe benefits provided to employees. The Act also repeals the tax exclusion for employer-provided education assistance (up to $5,250 per year).
The Tax Reform Act of 2014 would repeal sections 409A and 457A of the Internal Revenue Code, which provide rules governing nonqualified deferred compensation. Instead, the proposal would limit the ability to defer compensation through non-qualified deferred compensation plans by taxing all individuals when the compensation is no longer subject to a substantial risk of forfeiture — thereby eliminating the ability to defer compensation on the basis that the taxpayer does not have constructive receipt of the compensation.
The proposal would modify the current rules under Internal Revenue Code section 162(m) that limit the tax deduction for certain employees of a publicly traded corporation to no more than $1 million per year. Under the proposal, the definition of covered employee would be revised to include the CEO, CFO, and the three other highest paid officers (under current law the CEO and the three highest paid officers are covered employees), aligning it with SEC disclosure rules. The proposal would also repeal existing carve-outs from the deduction limitation for commissions and performance-based compensation, such as stock options. In addition, the reform plan would impose a 25% excise tax on compensation in excess of $1 million paid by a tax-exempt organization to one of its top five highest paid employees.
We believe the tax reform proposal released Wednesday has little chance of becoming law. However, the proposal does contain many modifications to employee benefit plans designed to raise revenue. It is possible that some of these provisions will be picked up in the future to offset federal spending and reduce deficits.
For more information about any of the matters discussed in this Employee Benefits Client Alert, or about the tax reform proposal generally, contact your Kutak Rock LLP attorney or a member of our Employee Benefits Practice Group.