Retirement policy provisions of the Build Back Better Act

November 18, 2021

The House of Representatives has delayed a vote on a slimmed down Build Back Better Act (BBBA), sending it to the Congressional Budget Office for a spending “score.” Reports are that, provided the CBO score is within White House estimates, moderate Democrats have agreed to vote for the bill.

The BBBA includes certain changes to the Internal Revenue Code’s corporate tax structure, notably a new corporate alternative minimum tax (AMT) which raises a question about the treatment of pension income. It also includes tighter rules with respect to Roth conversions and individuals with large IRA and defined contribution plan accounts.

In this (very) brief note, we review (1) certain key tax and benefits-related provisions that were dropped from the original (September 2021) proposal; (2) benefits-related provisions of that proposal that have been retained; and (3) the new corporate AMT proposal.

Dropped from the original proposal

The following were all included in the original proposal but have been dropped from the bill passed by the House:

Increase in corporate tax from 21% to 26.5%.
Increase in highest individual tax rate for “high earners” (e.g., joint filers with income over $450,000) from 37% to 39.6%.
Increase in investment (e.g., capital gains) tax rates from 20% to 25%.
House Ways and Means Committee Chairman Neal’s (D-MA) Automatic Contribution Plan or Arrangement (ACPA) proposal. This would have generally required all but the smallest employers to provide an automatic contribution retirement plan (e.g., a 401(k) plan with an automatic contribution feature) or auto-IRA for all employees.
Revised Saver’s Credit. This would have created new tax credit for low paid savings called the “Saver’s Match,” replacing the current “Saver’s Credit.”

Retained from the original proposal

The following benefits-related provisions of the original proposal have been retained (with a delayed effective date in some cases):

IRA Contribution limit capped: Contributions to IRAs would generally be prohibited where the total IRA and defined contribution plan accounts of high earners exceeds $10 million. Effective date (now) 2029.
Required distributions from large account balances: With respect to these accounts, in the year following the year in which the $10 million limit is exceeded, a minimum distribution of 50% of the excess would be required. Where the total in IRA and DC accounts exceeds $20 million, the lesser of that excess, or the total in Roth IRAs and Roth DC accounts, would have to be distributed from Roth IRAs and Roth DC accounts. Effective date (now) 2029.
DC reporting of large balances: DC plan administrators would be required to annually report to IRS, and to the participant, balances over $2.5 million. Effective date (now) 2029.
Elimination of conversions for high earners and of nondeductible contributions: IRA and qualified plan Roth conversions for high earners would be prohibited beginning in 2032. Roth conversions of nontaxable amounts (that is, nondeductible contributions) would be prohibited beginning in 2022.

New in the November 4, 2021, bill:

Corporate Alternative Minimum Tax: The revised bill includes a proposal for a corporate AMT of 15% on “adjusted financial statement income” for corporations with AFSI in excess of $1 billion. We are not corporate tax experts and are not going to analyze this proposal in detail, other than to make two retirement plan finance-related observations: (1) It is unclear how “pension income” shown on defined benefit plan sponsors’ financial statements would be treated under this proposal and whether it would be one of the “adjustments” or be subject to the corporate AMT. (2) If adopted, the corporate AMT may affect sponsor decisions about asset allocation and contribution timing. Sponsors will want to review both of these issues with their tax advisors. The new AMT would be effective in 2023.

***

If BBBA passes the House, it will go to the Senate, where (many believe) it is likely to undergo further revision.

We will continue to follow these issues.

November 18, 2021

Dropped from the original proposal

The following were all included in the original proposal but have been dropped from the bill passed by the House:

Increase in corporate tax from 21% to 26.5%.
Increase in highest individual tax rate for “high earners” (e.g., joint filers with income over $450,000) from 37% to 39.6%.
Increase in investment (e.g., capital gains) tax rates from 20% to 25%.
House Ways and Means Committee Chairman Neal’s (D-MA) Automatic Contribution Plan or Arrangement (ACPA) proposal. This would have generally required all but the smallest employers to provide an automatic contribution retirement plan (e.g., a 401(k) plan with an automatic contribution feature) or auto-IRA for all employees.
Revised Saver’s Credit. This would have created new tax credit for low paid savings called the “Saver’s Match,” replacing the current “Saver’s Credit.”

Retained from the original proposal

The following benefits-related provisions of the original proposal have been retained (with a delayed effective date in some cases):

IRA Contribution limit capped: Contributions to IRAs would generally be prohibited where the total IRA and defined contribution plan accounts of high earners exceeds $10 million. Effective date (now) 2029.
Required distributions from large account balances: With respect to these accounts, in the year following the year in which the $10 million limit is exceeded, a minimum distribution of 50% of the excess would be required. Where the total in IRA and DC accounts exceeds $20 million, the lesser of that excess, or the total in Roth IRAs and Roth DC accounts, would have to be distributed from Roth IRAs and Roth DC accounts. Effective date (now) 2029.
DC reporting of large balances: DC plan administrators would be required to annually report to IRS, and to the participant, balances over $2.5 million. Effective date (now) 2029.
Elimination of conversions for high earners and of nondeductible contributions: IRA and qualified plan Roth conversions for high earners would be prohibited beginning in 2032. Roth conversions of nontaxable amounts (that is, nondeductible contributions) would be prohibited beginning in 2022.

New in the November 4, 2021, bill:

Corporate Alternative Minimum Tax: The revised bill includes a proposal for a corporate AMT of 15% on “adjusted financial statement income” for corporations with AFSI in excess of $1 billion. We are not corporate tax experts and are not going to analyze this proposal in detail, other than to make two retirement plan finance-related observations: (1) It is unclear how “pension income” shown on defined benefit plan sponsors’ financial statements would be treated under this proposal and whether it would be one of the “adjustments” or be subject to the corporate AMT. (2) If adopted, the corporate AMT may affect sponsor decisions about asset allocation and contribution timing. Sponsors will want to review both of these issues with their tax advisors. The new AMT would be effective in 2023.

***

If BBBA passes the House, it will go to the Senate, where (many believe) it is likely to undergo further revision.

We will continue to follow these issues.

Retirement policy provisions of the Build Back Better Act – Update

Want to receive the latest articles?

Want to receive the latest articles?

Retirement policy provisions of the Build Back Better Act – Update

Want to receive the latest articles?

Want to receive the latest articles?