Legislation
The Administration’s fiscal year 2024 budget proposes massive tax increases on corporations and upper-income taxpayers, including a proposal from the Build Back Better Act[1] to limit how much taxpayers are allowed to accumulate in their retirement plans.According to the Treasury Department’s description, the five-part retirement proposal would modify rules relating to retirement plans by preventing “excessive accumulations by high-income taxpayers in tax-favored retirement accounts and make other reforms.” The White House estimates that these changes would raise $22.7 billion over the period 2024-2033.
Distributions of excess retirement plan accruals: The proposal would impose special distribution rules on high-income taxpayers with large retirement account balances. As such, a high-income taxpayer with an aggregate vested account balance under tax-favored retirement arrangements that exceeded $10 million in a preceding calendar year would be required to distribute a minimum of 50% of that excess. The arrangements included in this calculation would be:
- defined contribution plans to which Internal Revenue Code (IRC) Section 401(a) or 403(a) applies;
- annuity contracts under IRC Section 403(b);
- eligible deferred compensation plans described in IRC Section 457(b); and
- IRAs.
If the high-income taxpayer’s aggregate vested account balance exceeds $20 million, then the required distribution is subject to a floor, which would be the lesser of (a) that excess and (b) the portion of the taxpayer’s aggregate vested account balance that is held in a Roth IRA or designated Roth account.
A taxpayer is considered a high-income taxpayer if their modified adjusted gross income is over $450,000 if married and filing jointly (or filing as a surviving spouse); over $425,000 if the taxpayer is a head-of-household; or over $400,000 in other cases.
The taxpayer would generally be permitted to choose from which plan the required distribution is paid, but if the floor applies, then the distribution must come first from Roth IRAs and then from designated Roth accounts. In addition, the taxpayer may not specify that any of the required distribution come from an employee stock ownership plan (ESOP) to the extent the account under the ESOP holds employer securities that are not readily tradable on an established securities market.
Under the proposal, plan administrators would be required to report to the Department of Treasury the vested account balance of any participant or beneficiary for whom the vested account balance exceeds $2.5 million (adjusted for inflation).
The other four parts of the proposal include the following.
Limit rollovers and conversions to designated Roth accounts or to Roth IRAs. To address the so-called “back-door” Roth IRA strategy and a similar one for retirement plans, the proposal, among other things, would prohibit a rollover to a Roth IRA of an amount distributed from an account in an employer-sponsored eligible retirement plan that is not a designated Roth account (or of an amount distributed from an IRA other than a Roth IRA) for a high-income taxpayer. The provision would also prohibit rollovers or transfers of amounts that are not held within a designated Roth account into a designated Roth account for a high-income taxpayer.
The proposal also would prohibit a rollover of a distribution from a tax-favored retirement arrangement into a Roth IRA unless the distribution was from a designated Roth account within an employer-sponsored retirement plan or was from another Roth IRA if any part of the distribution includes a distribution of after-tax contributions. Similarly, the proposal would prohibit a rollover of a distribution from a tax-favored retirement arrangement into a designated Roth account if any part of the distribution includes a distribution of after-tax contributions, unless the distribution was from a designated Roth account.
Clarify disqualified persons for purposes of IRA prohibited transactions. The proposal would clarify that the individual for whom an IRA is maintained is always a disqualified person for purposes of prohibited transaction rules.
Prohibit IRA purchase of a DISC or FSC ownership interest. The proposal would prohibit an IRA from holding an interest in a DISC or FSC that receives a payment from an entity owned by the IRA owner. The sanction for a violation of this prohibition would be the same as the sanction for an IRA owner engaging in a prohibited transaction (i.e., the IRA would be deemed to have distributed all of its assets as of the first day of the taxable year).
Extend statute of limitations. The statute of limitations in the case of a substantial error relating to valuation of assets with respect to an IRA would be extended from three years to six years. The proposal would also extend the statute of limitations for the excise tax on prohibited transactions from three years to six years.
Overview and Additional Tax Increases
As the opening salvo in the forthcoming budget and debt limit debate, Biden’s FY 2024 budget proposal outlines his tax and spending priorities. Overall, the budget proposal estimates $4.8 trillion in revenues with $6.37 trillion in spending, resulting in an annual budget deficit of $1.846 trillion for FY 2024. The budget also seeks to reduce the federal budget deficit by $3 trillion over the next decade through additional tax reforms described as ensuring that “the wealthiest Americans and biggest corporations to finally pay their fair share.”
Beyond the proposal to cap total retirement plan accruals, the budget does not include any specific proposals to address retirement security — perhaps because the SECURE 2.0 Act was just enacted — but it does include a number of other proposals that would impact the business operations for advisors and plan sponsors.
Tax Rates, Carried Interest and Capital Income
In the area of “ensuring the wealthiest Americans and multinational corporations pay at least a minimum tax,” the budget seeks billions in new revenue by raising taxes on corporations, pass-through entities and upper-income taxpayers. This includes raising the top marginal income tax rate for individuals, increasing the corporate tax rate and increasing the excise tax on corporate stock buybacks, among others.
Contending that the 2017 tax law delivered “massive tax cuts” to the top 1%, the budget would restore the top tax rate of 39.6% for single filers making more than $400,000 a year and married couples making more than $450,000 per year.
The budget also proposes taxing capital gains at the same rate as wage income for those with more than $1 million in income and closes the so-called “carried interest loophole that allows some wealthy investment fund managers to pay tax at lower rates than their secretaries.” The budget also includes a 25% minimum tax for those with wealth of more than $100 million.
As to “ensuring corporations pay their fair share,” the budget would increase the corporate tax rate to 28%, which the administration points out is still below the 35% rate that stood before the 2017 tax law.
Moreover, building on the surcharge on corporate stock buybacks that President Biden signed into law last year, the budget proposes quadrupling the stock buybacks tax from 1% to 4% to “address the continued tax advantage for buybacks and encourage corporations to invest in productivity and the broader economy.”
- Increase the top marginal income tax rate to 39.6% ($235 billion)
- Reform taxation of capital income ($213.8 billion)
- Impose of minimum income tax on the wealthiest taxpayers ($436 billion)
- Raise the corporate income tax rate to 28% ($1.3 trillion)
- Increase the excise tax rate on repurchase of corporate stock ($238 billion)
- Tax corporate distributions as dividends ($1.4 billion)
- Prevent basis shifting by related parties through partnerships ($64 billion)
- Accelerate and tighten rules on excess employee remuneration ($14 billion)
Medicare Payroll Taxes and NIIT
In addition, the proposal would raise payroll taxes on upper-income taxpayers to help extend the solvency of Medicare Part A. More specifically, it proposes to raise Medicare taxes from 3.8% to 5% on annual income above $400,000.
It also would apply the net investment income tax (NIIT) to the pass-through business income of high-income taxpayers to ensure they are subject to either the NIIT or SECA tax, and it would increase the net investment income tax rate. The NIIT rate would be increased by 1.2 percentage points for taxpayers with more than $400,000 of income, similarly bringing the marginal NIIT rate to 5% for investment income above the threshold. Combined with the increase in Medicare payroll taxes, these proposals would raise an estimated $650 billion over the period 2024-2033.
What’s Next?
The submittal of a president’s budget is typically one of the first steps in the annual budget policy debates between Congress and the president. Congress will now develop its own set of budget and spending proposals for fiscal year 2024, which begins Oct. 1, 2023.
While the overall budget has been declared “dead on arrival” by congressional Republicans who control the House of Representatives, it does serve as a marker on the Biden administration’s priorities. The leadership from both sides have vowed not to touch Medicare or Social Security as part of the budget negotiations, but there are increased rumblings from various members that something needs to be done about the federal government’s overall budget deficit in relation to increasing the debt limit.
Finding out More
More information is available from these sources:
The White House Budget Page is here.
Footnote
[1] The House had approved the Build Back Better legislation in November 2021, but it was never passed by the Senate. After stalling in the Senate, Congress in early 2022 turned its attention to the SECURE 2.0 Act.
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