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Limits on Wealthy Retirement Accounts Not in Inflation Reduction Act

Legislation

While the Build Back Better legislation sought to impose limits on higher-income individuals with large retirement account balances, the newly passed Inflation Reduction Act does not contain those provisions, targeting corporate taxes instead.  

Following a marathon weekend session, the Senate passed the Inflation Reduction Act on a party-line vote of 51-50 Aug. 7, with Vice President Kamala Harris casting the tie-breaking vote. The roughly $740 billion climate, health care and corporate tax package is now expected to be considered by the House of Representatives on Aug. 12.

Proposals to eliminate back door Roth conversions with after-tax contributions to either qualified plans or IRAs and to eliminate Roth conversions in general for both IRAs and qualified plans for high-income taxpayers were not included as revenue raises to offset the cost of the broader bill.

The Inflation Reduction Act is a significantly scaled-back version from the multi-trillion-dollar Build Back Better legislation that had been proposed last year. Earlier iterations of the BBB had also included proposals to impose contribution limits for individual retirement plans of high-income taxpayers with large account balances and mandatory RMDs for high-income taxpayers with large retirement balances, but those did not resurface either. 

Corporate Tax Changes

However, the legislation does include a 15% minimum corporate tax and a 1% excise tax on stock buybacks. These proposals are estimated to raise $331 billion through the 10-year period 2022-2031, according to preliminary estimates by the Joint Tax Committee (although this estimate is likely to change due to last-minute changes to the bill) to be allocated toward deficit reduction. In addition, the IRS is slated to receive an additional $80 billion in funding to beef up its enforcement efforts, hiring 87,000 additional investigators and auditors.  

A proposed tax increase on private equity managers’ carried-interest income was dropped at the request of Sen. Kyrsten Sinema (D-AZ), who was a key swing vote in passing the legislation. 

The corporate alternative minimum tax provision does include a provision addressing concerns that defined benefit pension plan asset gains would be subject to the tax and deductions would be denied for sponsor contributions to pension plans.

Stock Buyback Criticism

The excise tax on stock buybacks of publicly trade corporations received quite a bit of criticism from Republican lawmakers, including from the ranking members of the House Ways & Means Committee and the Senate Finance Committee, as well as Sen. Rob Portman (R-OH).  

To calculate the tax, the fair market value of the repurchased stock would be reduced by the fair market value of any stock issued by the covered corporation during the tax year, including stock issued or provided to employees of the corporation or specified affiliates. 

A press release from Ways & Means Committee ranking member Rep. Kevin Brady (R-TX) stated that, “Democrats are threatening companies that return value to retirees or to 401(k) plans or to pension plans with a punitive tax. Their unvetted stock buybacks tax is a crippling tax that reduces retirement security for American seniors.” 

Similarly, during the Senate’s debate on the legislation, Portman argued that it would increase the price of stocks to allow buybacks and by taking away that incentive by putting a tax on it, there will be less of it. “So, the reality is this is a tax on working families including those trying to save for retirement when they are already dealing with the struggling portfolios due to the recent economic contraction and record inflation we’re experiencing,” Portman stated, noting that 58% of Americans own stock and 60 million investors invest in an individual retirement account or a 401(k). 

Senate Finance Committee chairman Sen. Ron Wyden (D-OR), who sponsored the stock-buyback provision, stated that, “Rather than investing in their workers, mega-corporations used the windfall from Republicans’ 2017 tax cuts to juice their stock prices and reward their wealthiest investors and their executives through massive stock buybacks.” Wyden adds that his proposal with Sen. Sherrod Brown (D-OH) “… simply ends this preferential treatment and encourages mega-corporations to invest in their workers.”

A word of caution: Just because the aforementioned retirement plan provisions were not included in the Inflation Reduction Act, there’s always a chance they could resurface in future legislation. While that doesn’t appear likely at this point, once a proposal has been put on the table, the threat never really goes away, as lawmakers search for revenue to offset the cost of legislation.