Tax Reform 2.0 mark-up sets up messaging votes, future talks

Male and female conversing on steps of capital buildingThe House Ways and Means Committee approved a package of legislation branded as “Tax Reform 2.0” on Sept. 13, clearing the way for House messaging votes on taxes before the election and offering a preview of several tax provisions that could eventually be part of bipartisan negotiations.

The Ways and Means Committee divided their package into three separate bills. At the heart is H.R. 6760, which would make all the individual tax changes in the Tax Cuts and Jobs Act (TCJA) permanent. The changes are currently set to expire at the end of 2025. H.R. 6760 has virtually no chance in the Senate because of fierce Democratic opposition, and a House vote would largely be about political messaging before the election. But the other two bills do include provisions that could find bipartisan appeal in future negotiations or even a year-end tax deal.

The Family Savings Act of 2018 (H.R. 6757) is a $21 billion package of retirement plan and savings provisions. It incorporates several provisions from the Retirement Enhancement Savings Act of 2018 (RESA), a bipartisan bill that both Senate Finance Committee Chair Orrin Hatch, R-Utah, and ranking minority member Ron Wyden, D-Ore., support. These provisions include:

  • Allowing unrelated entities to participate in multiple employer 401(k) plans (also known as “open MEPs”)
  • Repealing the 70.5-year age cap on making contributions to an individual retirement account (IRA)
  • Allowing graduate students to contribute non-tuition fellowship and stipend payments to an IRA
  • Prohibiting plans from making loans to participants through credit cards and other similar arrangements

The third bill (H.R. 6756) is aimed at encouraging startups and would increase the cap on the ability to expense start-up and organizational costs and amend Section 382 to allow taxpayers to use certain “start-up” losses and credits more quickly after a change in ownership.

House Republican leaders have indicated they hope to bring all three bills to the floor for votes before the November elections, and perhaps as early as this month. The idea is to highlight tax reform as a Republican achievement before the November elections, and force Democrats in contested districts into tough votes. But there has been internal debate in the Republican caucus about the value of the votes. Polls gauging the support for tax reform among the public show a fairly even split, and many Republicans in Democratic-leaning states have expressed concern about voting to make permanent the cap on deducting state taxes. Republican leaders gave themselves some flexibility on whether and how they hold votes by dividing the legislation into three bills. Whether or not any or all of the bills pass in the House, the Senate is not expected to take them up in their current form. However, some of the individual provisions from the savings and entrepreneurial packages could be considered in year-end tax discussions.

After the elections, Republicans and Democrats are expected to work on a bill to retroactively extend the popular tax provisions that expired at the end of 2017 and make a limited number of technical corrections to TCJA. Democrats have so far been stingy about allowing fixes for tax reform, but there is bipartisan support for fixing provisions on bonus depreciation for qualified improvement property and the effective date of net operating loss carryback rules.

The year-end package could also become a vehicle to carry other noncontroversial and bipartisan tax priorities, including provisions on IRS administration bills and retirement incentives. Bipartisanship has been scarce for the last several years, but an agreement on these issues is not impossible and could include provisions from the new House bills. More details on the provisions are included below.

Making the individual changes permanent H.R. 6760 would make all the individual changes in the TCJA permanent. House Republicans faced revenue challenges when drafting the TCJA because they used the reconciliation process to avoid Senate procedural hurdles. To avoid a revenue loss outside the 10-year budget window, they chose to sunset nearly all of the individual changes at the end of 2025, including:

  • Rate cuts and income thresholds across the tax brackets
  • Limits on itemized deductions like state and local taxes and mortgage interest
  • Increases in the alternative minimum tax exemptions
  • A new 20% deduction from certain pass-through business income

The only exceptions to the sunset were provisions repealing the individual mandate and slowing inflation adjustments for the tax brackets. H.R. 6760 would generally make all the expiring provisions permanent. The cost estimate is $627 billion, but only includes three years of extension within the 10-year budget window.

If Republicans manage to retain control of both chambers in the November elections, they could use reconciliation once again to enact another expansive tax bill. However, because reconciliation bills cannot lose revenue outside the 10-year budget window, they still would not be able to make the individual tax breaks permanent without fully offsetting the cost.

Retirement and savings provisions H.R. 6757 includes provisions aimed at both retirement plans and general savings. It is estimated to cost $21 billion over the next 10 years. The most significant provision would allow unrelated employers to join together to offer a multiple-employer defined contribution plan such as a Section 401(k) plan. Under current law, employers generally must be part of a bona fide group or association that has something in common besides cosponsoring a plan to participate in multiple-employer plan (also known as the “commonality” requirement). This provision would also repeal guidance that imposes several consequences on all participating employers in a multiple-employer plan for compliance failures by a single member (elimination of the so-called “one bad apple” rule). President Donald Trump also recently issued an executive order instructing Labor and Treasury to consider easing some of these restrictions through the issuance of guidance.

Other qualified retirement plan changes for employers in the bill include:

  • Extending the deadline for choosing to use the non-elective contribution safe harbor method
  • Barring plans from offering loans to employees that can be accessed through credit cards
  • Allowing participants to roll an annuity investment into an IRA (or another employer’s plans) if a plan eliminates the annuity as an investment option
  • Deeming certain custodial accounts in a Section 403(b) plan that has been terminated to be an IRA
  • Expanding the types of employees of nonqualified church-controlled organizations to be covered under retirement income account 403(b) plans
  • Extending the deadline for establishing a non-401(k) plan from the last day of the taxable year to the extended due date of the return for such year
  • Providing nondiscrimination testing relief for certain closed or frozen defined benefit plans and with respect to certain make-whole contributions under a defined contribution plan

In addition, the bill includes several retirement provisions focused on individual relief, including

  • Creating an exception from required minimum distributions for individuals with aggregate retirement account balances of $50,000 or less
  • Treating fellowship grants and scholarships as compensation that can be contributed to an IRA
  • Lifting the 70.5-year age cap on making IRA contributions
  • Providing separate caps for armed forces reservists on contributions to the Thrift Savings Plan and other defined contribution plans
  • Allowing penalty-free withdrawals of up to $7,500 from an IRA and other individual account plans for the birth or adoption of a child and allowing taxpayers to recontribute these amounts regardless of contribution limits

The bill also expands the list of expenses eligible for Section 529 plan distributions to include certain student debt and expenses associated with elementary school, high school, apprenticeships, home-schooling, and educational therapies for students with disabilities.

The most expensive provision would cost an estimated $8.6 billion over 10 years and create universal savings accounts. These accounts would allow taxpayers to contribute up to $2,500 per year, not to exceed an individual’s includible compensation for the year. There are no other income phase-outs or restrictions. No deduction would be provided for contributions, but the accounts would grow tax-free and taxpayers could take distributions tax-free at any time for any reason. They would operate similar to Roth IRAs for general savings.

Lawmakers have been discussing bipartisan retirement and savings reforms for several years, but Republicans did not include many in TCJA. Although the bitter partisan divide over TCJA as a whole will undermine efforts to agree on more incremental reforms, there may be some opportunity to include some of these provisions in the year-end tax package for technical corrections and extenders. The most likely provisions to gain traction will be the ones also included in RESA (H.R. 5282, S. 2526), which the lead Senate tax writers from both parties have endorsed. Other provisions, such as universal savings accounts, will likely attract less bipartisan support.

Entrepreneurial package H.R. 6756 contains just two provisions aimed at startups. Under two separate provisions in current law, businesses can deduct $5,000 in start-up expenses and $5,000 in organizational expenses. Both of these allowances phase out on a dollar-for-dollar basis by the amount that total expenses in each category exceed $50,000. Any amounts not qualifying for expensing must be amortized over 180 months. H.R. 6756 would combine organizational and start-up expenses into a single category eligible for up to $20,000 in expensing with a $120,000 phase-out, with both figures indexed to inflation.

In addition, the bill amends Section 382 to relax restrictions on the use of certain NOLs and credits related to start-up activity. Section 382 limits the use of tax attributes after a change in ownership, generally defined as when more than 50% of a corporation’s stock changes hands either in a single transaction or through multiple transactions over a three-year period. H.R. 6757 would generally provide an exception from Section 382 limits for losses and credits arising in the three-year period when a new trade or business is considered active within the meaning of the proposed changes to Section 195 in the bill.

Contact Dustin Stamper
Head of Tax Legislative Affairs
Washington National Tax Office
T +1 202 861 4144

Omair Taher
Senior Associate
Washington National Tax Office
T +1 202 861 4143

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