When All Is Said and Done, Will Tax Reform Spare Employee Benefits?

Employers fear that Congress might not keep its hands off employee benefit plans

By Stephen Miller, CEBS May 2, 2017

Benefit plan sponsors breathed a sigh of relief last week when President Donald Trump released a broad overview of his plan for tax reform. Employers had worried that the administration might revoke the tax exclusion for retirement plan contributions and group health plan premiums to offset tax revenue lost from lower personal and corporate income tax rates.

While that didn't happen, employer groups remain concerned that GOP House and Senate leaders writing the tax reform bill might not keep their hands off employee benefits.

There's reason to be worried:

"We are going to eliminate most of the tax breaks that mainly benefit high-income individuals. Home ownership, charitable giving and retirement savings will be protected—but other tax benefits will be eliminated," said Gary Cohn, Trump's chief economic advisor and director of the National Economic Council, in a White House blog post.

"We're very glad that the importance of retirement savings was specifically mentioned," noted Brian Graff, CEO of the American Retirement Association, which represents plan sponsors and advisors. "However, this is the beginning, not the end, and we need to remain vigilant. Let's remember that it's Congress that writes the tax law, not the president. This show is far from over."

The ERISA Industry Committee, which represents large employers, said it was "pleased with President Trump's tax reform framework, which avoids imposing dangerous taxes on employer-sponsored health and retirement plans." But the group's president and CEO, Annette Guarisco Fildes, warned that various congressional proposals over the year have called for dramatic changes to the tax treatment of defined contribution plans, "such as replacing pretax contributions with after-tax Roth contributions," and raised the possibility that those changes could still find their way into a tax reform bill.

For instance, a 2014 tax plan by then-Ways and Means Committee chair David Camp, R-Mich., would have allowed employees to contribute only half of the maximum annual deferral amount into a traditional 401(k) account using pretax dollars and would have required any contributions in excess of half of the annual limits to be made with post-tax dollars to a Roth 401(k) account.

Last week, White House Press Secretary Sean Spicer answered a question during a press briefing about the tax treatment of 401(k)s by saying "the current plan right now both protects charitable giving and mortgage interest, and that's it." When pressed, he told reporters, "Let me get back to you on that."

After the briefing, the White House clarified that Trump's plan would not affect 401(k) contributions and that preferential tax treatment for 401(k) contributions aren't technically deductions, which are claimed when filing income taxes, since they are excluded from the income-tax base upfront, the Wall Street Journal reported.

Many are still concerned that "tax reform proposals may seek to change the tax treatment of employer-sponsored benefits and, specifically, employer-provided retirement plans," said Kathleen Coulombe, senior associate with Government Affairs at the Society for Human Resource Management (SHRM). "This exclusion is the second largest loss to the treasury [after the exclusion for group health plan premiums] and can appear to be a source of revenue."

Employers also grew concerned about tax benefits for employer health plans when, during an April 26 press briefing, Cohn and Treasury Secretary Steve Mnuchin failed to respond to questions about health care deductions.

Repealing the ACA's Net Investment Tax

While the president's plan is silent on the tax treatment of health care premiums, it does call for one major change to the Affordable Care Act (ACA): the elimination of the ACA's 3.8 percent net income investment tax, which applies to taxpayers with a modified adjusted gross income of more than $200,000 for single filers and $250,000 for married couples filing jointly.

Cohn said the tax hits small business owners hard, since their business earnings are often treated as personal income, and is a drag on economic growth.

Congress Eyes Tax Benefits

House Speaker Rep. Paul Ryan, R-Wis., and Ways and Means Committee chairman Rep. Kevin Brady, R-Texas, said that the White House policy points would "serve as critical guideposts" for Congress, leaving in question how far their actual legislation will differ from the administration's guidance.

Ryan has long been interested in tax reform. Last June, he released the House GOP's "A Better Way for Tax Reform" blueprint, stating that "The Committee on Ways and Means will examine existing tax incentives for employer-based retirement and pension plans in developing options for an effective and efficient overall approach to retirement savings." But elsewhere, it was noted that "This Blueprint will continue the current tax incentives for savings." Some said the document itself appeared to contain conflicting viewpoints.

A related House leadership "Better Way" brief on health care, also released last June, proposed subjecting employer-paid health insurance to payroll and income taxes once the value exceeds a yet-to-be-determined dollar amount. This cap would then be adjusted based on the age of covered employees and would account for geographical differences in the cost of medical insurance.

This idea resurfaced in an early draft of the American Health Care Act but was not included in the version introduced for debate in March, which instead kept in place the so-called Cadillac tax—a 40-percent excise tax on high-value health plans.

 [SHRM members-only how-to guide: How to Design an Employee Benefits Program]

Protecting Employee Benefits

SHRM opposes changing the tax treatment of employer-provided benefits.

Limiting the tax exclusion on premium payments "would drive workers from employer plans and negatively affect the benefit offerings that employers so carefully create for their employees," said Mike Aitken, SHRM's vice president of government affairs. "Any health care reform legislation must support employer flexibility and innovative strategies and preserve the favorable tax treatment of employer-sponsored coverage."

SHRM is on the steering committee of The Coalition to Protect Retirement, a group that sent an April 2017 letter to Brady stating that "Any changes brought about by tax reform should be designed to promote greater savings and provide higher levels of retirement security."

"A comprehensive and flexible benefits package is an essential tool in recruiting and retaining talented employees," SHRM's Coulombe said. "The government should facilitate and encourage voluntary employer-sponsored plans, as well as individual savings."

Related SHRM Article:

Expect a Push to Tax Health Benefits, Political Watchers Warn, SHRM Online Benefits, April 2017

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