The Senate passed early Saturday a sweeping $1.4 trillion tax cut package that includes troublesome aspects for small-business retirement plans.
The Tax Cuts and Jobs Act, which must now be reconciled with the House version, passed by a vote of 51-49. One Republican, Sen. Bob Corker of Tennessee, voted against the bill, and all Democrats voted no.
House Speaker Paul Ryan, R-Wis., stated after the vote that lawmakers now will “move quickly to a conference committee so we can get a final bill to President Trump’s desk.”
Brian Graff, president and CEO of the American Retirement Association, says the Senate bill’s pass-through language creates a disincentive for small-business owners to offer retirement plans.
The Senate bill “would increase the deduction for pass-through income from 17.4% to 23%. So for business owners with pass-through income that would be subject to a 35% ordinary tax rate, the effective tax rate on their pass-through income is slightly less that 27%,” Graff said.
The nettlesome issue is that because “retirement plan contribution allocable to the business owner is effectively deducted at the pass-through tax rate of 27%, and then subject to the ordinary tax rate of 35% when distributed at retirement, you have essentially eliminated the value for the business owner to save in the plan,” Graff explains.
“In fact, the business owner would be financially better off paying the tax now and saving outside the plan.”
So the bill offers essentially little “motivation to take on the administrative costs and ERISA liability of a plan in that instance.”
The way to fix this is to have the small-business owners’ “allocable retirement plan contribution be separately stated and applied solely against income that is taxed at ordinary rates,” Graff said. But “the way this legislation is barreling through Congress, they haven’t had time to address technical issues like this.”
House Ways and Means Committee Chairman Kevin Brady, R-Texas, added in another statement that lawmakers will “take the best of both the House and Senate bills, make them even stronger in a conference committee, and finalize one piece of legislation” to hand to Trump this year.
Senate Finance Committee Chairman Orrin Hatch, R-Utah, said the measure “also takes a critical step forward in improving our nation’s flawed and unworkable health care system” by effectively repealing the “regressive Obamacare individual mandate tax.”
With this move, Hatch said, “we are putting Americans in charge of their health care and giving them the freedom to choose the best coverage for themselves and their families.”
A repeal of the individual mandate would reduce federal deficits by $338 billion over the next 10 years but would result in 13 million more uninsured Americans in that time, according to the Congressional Budget Office.
Comparing the House and Senate Bills
The Tax Foundation on Saturday issued an analysis comparing the House and Senate bills that are to be reconciled in conference.