Senate Finance Committee Staff Report Suggests Changes In Tax Treatment Of Employee Benefits

On May 23, the staff of the Senate Finance Committee issued the seventh in a series of reports outlining alternatives for the members of the committee to consider as they begin work on tax reform legislation. The most recent report, Economic Security, discusses potential goals that could be achieved by modifying tax rules in the areas of retirement income, healthcare benefits, executive compensation, life insurance and annuities and employee fringe benefits. The report also summarizes a wide range of modifications that have been proposed in each of these areas.

The report is significant for a number of reasons. First, it confirms that each of these areas will receive close scrutiny during the debate over tax reform. For example, the tax preferences currently in place for retirement income and healthcare benefits will likely receive special focus because these areas constitute two of the largest categories of "tax expenditures" under current law. Second, the report provides a comprehensive outline of reform proposals that have been suggested to date and that may be included in any legislative compromise on tax reform that ultimately is developed. Finally, the report highlights the complex nature of our current tax system and the competing goals that are at stake, which will likely complicate Congress's efforts to fashion a set of reforms. As evidence of this, some of the proposals described in the report are directly contrary to each other because they represent opposing views of what tax reform should primarily accomplish.

Retirement Income

Many of the reform proposals reviewed in the report focus on employer-provided retirement benefits. The proposals are grouped into the following categories:

Limit or Eliminate the Preferences for Retirement Savings

These proposals range from eliminating all preferences (such as deductions and exclusions for retirement savings) in favor of universal enrollment in an expanded version of Social Security, to more surgical measures aimed at specific types of exclusions. Examples of more specific modifications include lowering the dollar limits on tax-preferred contributions to defined contribution plans and IRAs, capping the employer deduction for amounts contributed to fund defined benefit plans and limiting the total amount that can be accrued over a lifetime in tax-preferred retirement plans. A version of the last proposal was included in the Obama administration's fiscal-year 2014 budget. Under the administration's proposal, an individual's total balance across tax-preferred accounts would be limited to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement. For someone retiring in 2013, such a balance would be approximately $3 million.

Replace All Deductions, Exclusions and Credits with a Unified Tax Credit

Under...

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