ARA Government Affairs Committee

Congressional Republicans, nursing their wounds after the bruising debate to repeal Obamacare ended in failure, look to regroup in the fall and get their legislative agenda back on track. The crown jewel in that agenda is passing a comprehensive and permanent tax reform package. But many practical and political obstacles remain in the path to the holy grail.

When Congress returns from their annual August recess after Labor Day, it will be immediately consumed by the crush of impending business that needs to be addressed in some form or fashion by the end of September. Two equally thorny issues await: funding the federal government and raising the debt limit. Congress has had significant trouble dealing with both issues in recent years and this go around should prove no exception.  If any or both of these issues drag on past September – which seems likely – it will delay the timing of the tax reform debate.

At the end of July, the so called “Big 6”* secretly negotiating the tax reform package issued a joint statement. In the statement, they expressed confidence that “a shared vision for tax reform exists.”  But precious little is known about the details of that shared vision. The one policy change that the Big 6 took off the table for good was the so-called border adjustability tax (BAT) that disallowed a business deduction for the cost of purchasing imported goods and services. To the extent revenue is needed to reduce the cost of the shared vision, it will now have to come from elsewhere. The Big 6 expects the tax-writing committees in the House and the Senate to begin working on the package in the fall.

* House Speaker Paul Ryan (R-WI, 1st), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch (R-UT), and House Ways and Means Committee Chairman Kevin Brady (R-TX, 8th).

On July 28, Congressmen Mike Kelly (R-PA, 3rd) and Ron Kind (D-WI, 3rd) introduced the Rightsizing Pension Premiums Act of 2017 (H.R. 3596). The legislation would revert single employer plan premium rates levied on small businesses with 500 or fewer employees to a flat rate of $19 per participant and a variable rate equal to .9% of unfunded vested benefits (neither amount indexed). All other businesses would have their premiums adjusted according to the Pension Benefit Guaranty Corporation’s (PBGC) funded status, which would now be based upon the rules established for private pension plans in the Pension Protection Act of 2006. The bill would also remove PBGC premiums from the federal budget for scoring purposes. Congress has repeatedly jacked up premium rates in recent years because it raises fake revenue. Should this bill become law, Congress will not be able to use PBGC premium rates as a revenue tool.

Government Affairs Contact: Andrew J. Remo, Director of Legislative Affairs, (703) 516-9300 Ext. 175, [email protected]

In September, President Trump struck a bipartisan deal with House Minority Leader Nancy Pelosi (D-CA, 12th) and Senate Minority Leader Chuck Schumer (D-NY) that provided some immediate federal funding for the various emergencies resulting from an active hurricane season, extended the temporary suspension of the debt limit, and funded all other federal government operations until December 8, 2017. Congress also passed a separate bill that would allow hurricane victims to access their 401(k) savings without incurring IRS penalties and taxes and loosen 401(k) plan loan rules. Specifically, the legislation would waive the 10 percent early withdrawal penalty (limited to $100,000 in withdrawals) and allow for the taxes on the distribution to be paid ratably over three years. Retirement plan loan limits in the impacted areas would also be effectively doubled to $100,000 and loan repayment periods would be extended.

On September 27, 2017, the Trump Administration and Republican Congressional leadership released their plan to change federal tax laws entitled “Unified Framework for Fixing Our Broken Tax Code.”

On the individual side, the Framework calls for a reduction in the current individual income tax brackets from seven to three: 12, 25 and 35 percent, with the potential for an additional top rate for high income earners.  It omits any mention of reducing current rates on investment income (capital gains, dividends, and interest).  It calls for doubling the standard deduction and increasing the Child Tax Credit, and repealing the Alternative Minimum Tax (AMT) and the estate tax.  It also includes a proposal from the House Republican Better Way tax plan to cap the top tax rate for pass-through business entities at 25 percent.

On the corporate side, the Framework calls for a reduction of the top marginal corporate tax rate from 35 percent to 20 percent. It would allow for immediate expensing of new investments for at least five years, and provides for a one-time repatriation tax on corporate profits sitting overseas. It calls for a move from the current worldwide tax system to a territorial tax system.

The Framework was purposefully vague about changes to the tax incentives for retirement savings. One significant change reportedly being considered is to require some or all contributions to a qualified retirement plan to be made on a Roth or after-tax basis.  But we just won’t know the details until we see the legislative text of the package.

The legislative process with tax reform will begin with the House Ways and Means Committee. Representative Kevin Brady (R-TX, 8th), Chairman of the House Ways and Means Committee, has said publicly that he will not release the legislative text of the tax plan until after Congressional Republicans finalize and pass a Budget Resolution for fiscal year 2018.  The Republicans are aiming to complete their work on a Budget Resolution for fiscal year 2018 by the end of October.

On September 27, Representative Richard Neal (D-MA, 1st), Ranking Member of the House Ways and Means Committee, and Senator Sheldon Whitehouse (D-RI) introduced the Automatic IRA Act of 2017 (H.R. 3499 and S. 1861).  The legislation would require employers who have 10 or more employees, and who also do not provide another qualified retirement plan for them, to enroll every worker automatically in a payroll deduction IRA program unless the employee opts out. The bill increases the small employer pension plan start-up tax credit to defray any cost to the employer of setting up the accounts. Given Republican control, the legislation is not expected to advance in the 115th Congress.

Government Affairs Contact: Andrew J. Remo, Director of Legislative Affairs, (703) 516-9300 Ext. 175, [email protected]

Congress recently wrapped up a busy work period in May, but is still left with unfinished business heading into the summer. The most pressing item on the Congressional agenda for June is the reauthorization of certain federal government surveillance provisions originally contained in the USA PATRIOT Act. Those provisions expired beginning June 1, 2015 and will remain that way for at least a brief period of time until Congress can agree on either an extension of or reforms to those surveillance authorities currently enjoyed by our federal intelligence agencies.

The other three politically thorny issues facing Congress in the coming weeks will be action on a bill to reauthorize federal highway programs, legislation granting President Obama trade promotion authority, and a decision on whether to renew the charter of the Export-Import Bank.

Out of those three issues, legislation to reauthorize federal spending on highways is one that is virtually guaranteed to be addressed in some form. The current authorization was set to expire on May 31, 2015, but Congress pushed that deadline back by two months before leaving for the Memorial Day holiday break. Congress was able to extend the authorization for two months without replenishing the Highway Trust Fund but will now need to make funding decisions to pay for these programs by the end of July, assuming Congress does not want to increase the budget deficit. Under that assumption, it is projected that Congress will need to pony up $10 billion just to extend these programs through the end of 2015.

Congress has resorted to retirement policy budget gimmicks in the past to shore up the Highway Trust Fund. For instance, in 2012, the MAP-21 transportation law contained a provision that stabilized pension plan interest rate projections and increased PBGC’s flat and variable premium rates, both of which “raised” billions of dollars in revenue. In 2013, PBGC premiums were raised further in a bipartisan budget deal to suspend sequestration for two years. In 2014, the MAP-21 pension plan interest rate corridor was extended in another transportation funding bill. The ARA GAC team is closely monitoring what will happen in 2015 if and when Congress goes back to the revenue well for transportation infrastructure spending.

The main activity on tax reform is in the Senate. The Senate Finance Committee’s bipartisan tax working groups, including the Savings & Investment Group examining the retirement provisions in the tax code, continue to meet and search for reform proposals that could garner widespread support. Chairman Orrin Hatch (R-UT) and Ranking Member Ron Wyden (D-OR) recently announced an extension of this process since trade issues have been consuming most of the Finance Committee bandwidth in recent weeks.

A possible “down payment” to a more comprehensive tax reform package could be a bipartisan deal on international or multinational corporate tax reforms. Senators Rob Portman (R-OH) and Chuck Schumer (D-NY), co-chairs of the International Tax Group, have been busy negotiating a package that could lower the corporate tax rate and create a new minimum tax on foreign earnings, while allowing multinational firms to repatriate those foreign earnings back to the United States below the current corporate income tax rate. The resultant revenue from this repatriation scheme could be used to pay for transportation infrastructure or other things. This deal, however, remains a heavy lift since numerous small businesses groups are generally opposed to corporate only tax reform because their members are mainly “pass-through” entities that will not benefit from a corporate income tax rate cut.

Congress passed its first budget in six years this month. The budget agreement sets the top-line discretionary spending amount at $1.1 trillion for fiscal year 2016 and allocates portions of that amount to different categories so that the appropriations committees can begin to fill in the details. The closely watched reconciliation instructions that were included in the package were limited to repealing the Affordable Care Act or Obamacare. There were no reconciliation instructions in the agreement concerning tax reform, making it less likely that Congress will push for a comprehensive tax reform package this year.

Last month, the Vice Chair of the House Democratic Caucus – the fourth position in the House Democratic Leadership hierarchy – Representative Joe Crowley (D-NY, 14th), unveiled a set of savings policy proposals. Included in these proposals is the creation of a new defined contribution program that would require employers with 10 or more employees to both offer a retirement plan to its employees and contribute to it. The program creates so-called “Secure, Accessible, Valuable, Efficient Universal Pension” (SAVE UP) accounts with auto enroll and escalation features for employees. Employers would be required to contribute to the SAVE UP accounts or to their existing workplace retirement arrangements a specific, inflation-adjusted amount per hour for each participant. The plan offsets some of the employer cost by providing a refundable tax credit to small employers (with less than $5 million in annual gross receipts) worth the value of their contributions into the accounts of up to 10 employees (or up to $10,400 a year for five years).

Rep. Crowley’s other proposals include the establishment of child saving vehicles called “USAccounts”. These accounts would be established for every new born child with $500 in seed money from the federal government. The federal government would also provide a match of family contributions to the account in succeeding years the amount of which would be based upon income. Rep. Crowley also proposed to make President Obama’s myRA program permanent, eliminate the earnings cap on Social Security withholding and maintain the current Social Security cost of living adjustment.

Finally, Congress reintroduced legislation this month supported by the American Retirement Association that would require retirement plans to include a “lifetime income stream equivalent” on plan participant statements. In the House of Representatives, Education and Workforce Committee Reps. Luke Messer (R-IN, 9th), Jared Polis (D-CO, 2nd), and Mark Pocan (D-WI, 2nd) as well as Ways & Means Committee Reps. Dave Reichert (R-WA, 8th), and Ron Kind (D-WI, 3rd), introduced the Lifetime Income Disclosure Act (H.R. 2317). Senators Johnny Isakson (R-GA) and Chris Murphy (D-CT) introduced a companion bill (S. 1317) in the Senate.

Government Affairs Contact: Andrew J. Remo, Director of Legislative Affairs, (703) 516-9300 Ext. 175, [email protected]

The House of Representatives took off for summer break after clearing a short term transportation funding bill, while the Senate passed the same bill, as well as a longer-term transportation bill last week.  It is anticipated to be an action packed fall with Congress attempting to address many politically tricky issues on tight deadlines, including:

• a resolution of disapproval for the Iran nuclear deal
• a federal government funding bill
• legislation reauthorizing the Federal Aviation Administration
• legislation renewing the charter of the Export-Import Bank
• a federal transportation funding bill
• legislation addressing the federal debt limit
• tax extender legislation

Congress does not return until mid-September and they will just have 12 legislative workdays to pass a resolution of disapproval for the Iran nuclear deal (and then override an expected presidential veto), and pass a government funding bill before the federal government shuts down on October 1, 2015.  (Authorization for the Federal Aviation Administration also expires at the end of September 2015.)  Legislation to fund the federal government might get caught up in abortion politics, increasing the likelihood of at least a temporary government shutdown.

But the fun does not end there.  The charter of the Export-Import Bank expired at the end of June 2015 and efforts to combine that issue with a longer-term transportation funding package failed to get traction in the House of Representatives this month (although it passed the Senate).  Expect to see a renewal of that effort in October 2015.  Also, last week Treasury Secretary Lew sent a letter to Congress estimating that action to increase the statutory federal debt limit is needed by October 30, 2015.

The short term transportation bill Congress opted to pass extends funding through October 29, 2015.  The legislation includes a provision that extends the maximum extension for the Form 5500 employee benefit plan information return from 2 ½ months to 3 ½ months for returns in years beginning after December 31, 2015.  So for 2016 calendar year plans, for example, the due date for filing the Form 5500 may be extended to November 15, 2017.

The bill also extends a provision, originally included the MAP-21 transportation bill that became law in 2012, that allows employers to transfer excess pension assets in a defined benefit plan to a health benefits account or an applicable life insurance account for four more years (from December 31, 2021 to December 31, 2025).  This extension raised $172 million.

On July 21, 2015, the Senate Finance Committee voted 23 to 3 to advance legislation that extends a variety of tax provisions in the Internal Revenue Code for the next two years, the so-called tax extenders bill.  The bill includes an extension of a provision that allows individuals to take tax-free distributions from IRAs for charitable purposes, the so-called IRA charitable rollover provision.  Earlier this year, the House Ways & Means Committee passed legislation extending this provision permanently.

The House of Representatives has shown a preference to address individual or small groups of extenders on a permanent basis, while the Senate is more interested in a shorter term extension of essentially all non-permanent current tax law to preserve a default status-quo in the Internal Revenue Code.  The two chambers will have to reconcile their philosophical differences in how to address these provisions before the start of the 2015 tax filing season in early 2016.

Government Affairs Contact: Andrew J. Remo, Director of Legislative Affairs, (703) 516-9300 Ext. 175, [email protected]