If Congress attempts to overhaul the tax code next year, one of the most influential lawmakers in the Senate indicated Monday he will defend tax incentives for retirement savings.
Sen. Orrin Hatch, R-Utah, the incoming chairman of the Senate Finance Committee, said his colleagues should not target tax breaks related to retirement accounts to find revenue for the government.
“As part of the unending effort on Capitol Hill to find more revenue to pay for increased spending, some have proposed reducing the allowed contributions to 401(k) plans and [individual retirement accounts],” Mr. Hatch said in
a speech at a Financial Services Roundtable event. “That, in my view, would be both short-sighted and foolish.”
As head of the Senate tax-writing panel, Mr. Hatch's position will carry much weight in any reform negotiations.
Last week, Mr. Hatch's committee staff
released a 340-page report saying retirement-savings incentives have the largest impact for the middle class. Skeptics of the tax breaks, which allow tax-free contributions to retirement plans, say they mainly benefit the wealthy.
“The private employer-based retirement savings system in the United States — particularly 401(k) plans and individual retirement accounts — has become the greatest wealth creator for the middle class in history and represents truly shared prosperity,” Mr. Hatch said.
Retirement-savings advocates have been worried that tax incentives would be
threatened in tax reform, as lawmakers attempt to lower rates across the board. The incentives are among the biggest so-called “tax expenditures,” and could become a source of revenue to pay for income tax rate reductions.
The signal sent by Mr. Hatch Monday is more reassuring than provisions that were included in a tax reform bill introduced by Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee. In Mr. Camp's plan, retirement-savings incentives would be curbed. When the measure was floated as a discussion draft earlier this year, it gained little support. Mr. Camp is retiring in January.
Mr. Hatch's approach “is definitely the direction we prefer going, over, for instance, the Camp proposal,” said Judi Carsrud, director of federal government relations at the National Association of Insurance and Financial Advisors.
Efforts by retirement-savings groups to emphasize that the tax incentives are deferrals rather than deductions — retirees will pay taxes on their nest eggs when they draw them down — is getting through to lawmakers, said Lee Covington, senior vice president and general counsel at the Insured Retirement Institute.
“We need to continue to educate members [of Congress],” Mr. Covington said. “But all the feedback we receive is that lawmakers want to continue the current tax treatment of retirement products.”
It's unclear whether Mr. Hatch has eliminated retirement-savings incentives from tax-reform negotiations. Those talks are likely to encompass every aspect of the code.
“Hatch would like to have them off the table,” said Judy Miller, director of retirement policy at the American Society of Pension Professionals and Actuaries and a former senior policy adviser on the Senate Finance Committee. “He's a key player but not the only one. It would be naïve to think they're off the table.”
That's why NAIFA and others will continue to press lawmakers to protect the tax breaks.
“We like the wind in our sails, but we wouldn't be complacent in our persistence in making sure all members of Congress understand … we need tax programs and pension programs that encourage individual savings,” Ms. Carsrud said.
It's also uncertain how much support Mr. Hatch's stance has with other top tax-reform players.
Rep. Paul Ryan, R-Wisc., the incoming chairman of the House Ways and Means Committee, declined to comment through an aide. The staff of Sen. Ron Wyden, D-Ore., the current Senate Finance Committee chairman and next year's ranking member, did not respond to a request for comment.
In his speech, Mr. Hatch outlined tax-reform principles that Congress should follow next year. They include “economic growth, fairness, simplicity, permanence, certainty, competitiveness, revenue neutrality” and “promoting savings and investment.”
Mr. Hatch also touted legislation he has introduced that would enable small businesses that don't offer retirement plans to their employees to set up so-called “starter 401(k)” plans. Under his bill, the nascent plans would have fewer administrative requirements and lower costs than traditional plans.
Another bill Mr. Hatch wrote, the Secure Annuities for Employee Retirement Act, encourages employer inclusion of annuities in 401(k) plans. The Treasury Department and Internal Revenue Service
approved use of annuities in target-date funds in 401(k) plans, including as a default investment, in October.
Mr. Hatch likely will reintroduce both bills in the new Congress next year.
The fact that Mr. Hatch highlighted his retirement-savings bills in his speech Monday is a good sign for debate on the topic in the new Congress, Ms. Miller said.
“This is further evidence that he is serious about it and we may see real improvements to the private retirement system next year rather than playing defense,” Ms. Miller said.
