House GOP bill a mixed bag for retirement savers

Thursday, on a party-line vote, the House Ways and Means Committee approved Chairman Kevin Brady’s (R-Texas) proposed “Tax Reform 2.0” legislation. 

While likely to pass the full House of Representatives shortly, the package — two tax bills with a retirement savings bill sandwiched in between — is not expected to be taken up by the Senate. 

{mosads}Instead, its actual purpose in the run-up to November’s midterms seems to be to give House Republicans something fresh to talk about when claiming credit for last year’s tax legislation while also forcing a politically tough vote on House Democrats. 

That said, while 2.0 may be only a pre-election political play, its retirement component (HR 6757 — the Family Savings Act) is not. As part of a less conspicuous but serious legislative process, much of HR 6757 is likely to become law within a year or so. 

That process began two years ago when the Senate Finance Committee unanimously approved what will likely be the most substantial retirement savings legislation in over a decade: the Retirement Enhancement and Savings Act (RESA). 

While various provisions are overreaching or otherwise fall short of good policy, overall, RESA would do significantly more good than harm and therefore should be enacted. However, the Senate and industry proponents have been trying, to no avail, to get the House to sign on.

HR 6757, as part of Tax Reform 2.0, is House leadership’s first explicit countermove. Brady vigorously reasserted during last week’s markup the prerogatives of his chamber and committee, pointedly reminding the Senate that the Constitution requires tax legislation to originate in the House. 

Declining to “rubber stamp” RESA, Chairman Brady has instead stamped it “not invented here.”  

HR 6757 does not completely reject RESA, but it incorporates only 10 of RESA’s 33 provisions, unfortunately omitting, among others, any fiduciary safe harbor to encourage 401(k)s to offer employees life annuities. 

However, HR 6757 does include RESA’s provision permitting unrelated small employers to realize economies of scale by co-sponsoring a single multiple employer plan (MEP) for their employees. 

Assuming adequate consumer protections, this long-standing bipartisan “open MEP” proposal should encourage broader coverage, although few expect it to have a dramatic impact.

The House bill also includes a provision that is proposed periodically, especially in conservative circles — Universal Savings Accounts. Such tax-favored, short-term personal savings accounts would take a step toward ultimately replacing our progressive income tax system with a consumption tax. 

The accounts would be taxed more favorably than Roth IRAs: contributions not deductible but all earnings and withdrawals tax-exempt. Unfortunately, there would be no IRA-type income eligibility limits targeting tax benefits largely to those more likely to respond by actually saving more. 

Nor would the new accounts have IRA-type tax rules encouraging saving to be for retirement or other long-term needs. Moreover, accumulated balances would not be limited, although annual contributions could not exceed $2,500 per individual ($5,000 for most couples filing joint returns).

High-income people would universally take advantage of this new tax break — mostly without saving more — by shifting taxable savings into the new vehicle.

The largest section of the Family Savings Act of 2018 covers the treatment of Multiple Employer Plans. Here’s how this bill would affect pooled retirements: https://t.co/NALexXOKMx pic.twitter.com/aQZY51SYLH

— Worksite (@WorksitePEO) September 17, 2018

Yet unlike IRAs and 401(k)s, these accounts are not designed to promote new saving by workers in lower income tax brackets for whom income tax deductions and exclusions are therefore less valuable. 

Allowing unrestricted withdrawals, these poorly designed vehicles would use tax preferences inefficiently while potentially crowding out at least those 401(k) contributions that are not matched by employers. 

Consistent with Tax Reform 2.0 as a whole, HR 6757 looks to be mainly about tax turf and tax cuts, not tax reform. Case in point: It proposes no revenue offsets to help pay for its estimated $21 billion in tax cuts. 

By contrast, RESA includes a revenue offset that, while heavily watered down, would reform to some extent the age 70.5 required minimum distribution (RMD) rules by beginning to limit “stretch” IRAs and plans currently permitting excessive post-death tax deferral.

Relating to RMDs, though, HR 6757 does include another significant bright spot. It incorporates the tax-cutting (but not revenue-raising) part of a two-part Obama administration legislative proposal, later taken up and expanded by Ways and Means Ranking Member Richard Neal (D-Mass.). 

The first part dramatically and progressively simplifies RMDs by completely exempting seniors with moderate account balances. The second part offsets some of this forgone revenue by restricting “stretch IRAs.” 

This reflects the policy purpose of the RMD rules — largely to ensure that the retirement tax preference is used mainly for financial support in retirement, not by the affluent to fund large bequests to heirs. 

That is why these rules gradually recoup, in retirement, the pre-retirement tax preferences for retirement savings, and why the average retiree, who needs to spend these savings to maintain a reasonable standard of living in retirement, should no longer have to worry about RMD compliance.

RESA should include an RMD exemption for seniors with moderate account balances, paid for by beefing up stretch IRA reform. 

That said, RESA is “small ball” compared to Congress’s main unfinished business in the private pension area: to address our coverage gap by automatically enrolling in private-sector IRAs the 55 million workers who have no access to employer plans. But that’s a subject for another day.  

Mark Iwry was senior advisor to the secretary of the Treasury and oversaw retirement policy at the U.S. Treasury Department from 2009 to 2016. He is a nonresident senior fellow at the Brookings Institution and a visiting scholar at the Wharton School at the University of Pennsylvania.