September 1, 2021

Washington Update: While Tax Talk Dominates Washington, Retirement Issues Await Action

Congress headed into the fall juggling a daunting list of huge issues, including the $1 trillion infrastructure package, a proposed $3.5 trillion spending package focused on social programs, a potential government shutdown at the end of September and the need to raise the debt ceiling. Not surprisingly, retirement issues have taken a bit of a backseat for the time being, but we continue to closely monitor bipartisan retirement savings legislation that could pick up momentum later this year. Here's an outlook for key tax and retirement issues as Congress gears up for a busy fall.

Tax increases top the agenda – but clarity remains elusive

The summer was dominated by lengthy negotiations over two sweeping pieces of legislation – the bipartisan infrastructure bill and the Democrats-only package of spending on social programs, likely to include an expansion of Medicare, free community college, a national paid leave program, universal pre-kindergarten and more. Investors and investment advisers are keying on the latter package to determine what tax increases will be included to offset the spending plans.

As of the end of August, the final details were still in development. A modest increase in the corporate tax rate and a return of the top individual income tax rate to 39.6% seem all but certain to be included. Less certain was whether Democrats on Capitol Hill would make any changes to capital gains taxes and/or the estate tax. In his American Families Plan, the proposal unveiled by the White House last spring that forms the basis of the Democrats' priorities, President Biden called for taxing capital gains as ordinary income for the wealthiest taxpayers, those with more than $1 million in income. That is likely an overreach, but a top capital gains rate in the 25%-28% range remains very much in the mix.

The president also called for ending the step-in basis for inherited assets. That proposal received significant pushback from some Capitol Hill Democrats who are concerned about the potential impact on family farms and multi-generation family-owned businesses. But some changes to the estate tax are still part of the discussion and could be included in the final version of the legislation.

Other tax code changes are also at least under consideration. Some on Capitol Hill have advocated for capping itemized deductions at 28% for the top income bracket, echoing a campaign proposal of Joe Biden's from 2020. Biden, notably, did not include this proposal in the American Families Plan. Such a proposal could impact the tax treatment of retirement savings contributions and charitable donations for wealthier filers.

The bottom line as of the end of August is that we're still waiting for what's in and what's out of the Democrats' ambitious plan. Crafting a package that can win the support of a majority of Democrats in the House – where the party has just a four-seat advantage – and all 50 Democrats in the Senate will not be easy. Expect lots of twists and turns as the package is developed, and it may be October or November before we know for sure whether the proposal can sneak through the narrowly divided Congress.

Waiting its turn: "SECURE 2.0" legislation

Meanwhile, one of the few issues that has garnered widespread bipartisan support on Capitol Hill is retirement savings, where both chambers have signaled strong backing for legislation affectionately known as "SECURE Act 2.0". House Financial Services Committee Chairman Richard Neal (D-MA) and the panel's top Republican, Rep. Kevin Brady (R-TX) introduced their "Securing a Strong Retirement Act" in May. In June, Senators Ben Cardin (D-MD) and Rob Portman (R-OH) introduced their Retirement Security and Savings Act. While the two bipartisan bills are not identical, they overlap by 70-80%. Key features of both bills include a slow increase in the required minimum distribution age to 75 over several years; an increase in the contribution limits for savers approaching retirement age; an expansion of the Savers' Credit for lower-income individuals; provisions to help businesses start and expand access to retirement savings opportunities for employees; and more.

In July, the Senate Finance Committee held a wide-ranging hearing that underscored the broad support for the legislation. The hearing heard from witnesses from various retirement advocacy organizations, including the AARP, the American Retirement Association and the ERISA Industry Committee, as well as the state treasurer from Oregon, who testified about the state's Auto IRA program. Committee Chairman Ron Wyden (D-OR) focused a portion of his remarks on recent press reports of multi-billion dollar IRAs and said he would seek to address the issue in any legislation. Wyden also has a bill that would turn the Savers' Credit from a tax credit into a government matching contribution of up to $1,000 per year, which could also be included in a final package of reforms.

The outlook for retirement legislation remains very positive, but the question of timing is less clear. With the back-up of major legislative items likely to dominate much of the fall, it may be very late in 2021 or early in 2022 before Congress turns to the retirement bills.

Biden taps nominee for key Labor Department position

In late July, President Biden announced his intention to nominate Lisa M. Gomez as the Assistant Secretary of Labor for Employee Benefits. In that role, Gomez would head the Employee Benefits Security Administration (EBSA), which oversees employer-sponsored retirement and benefit plans. Gomez has been an attorney at Cohen, Weiss and Simon LLP, a New York law firm, since 1994 and currently serves as chair of the firm's management committee. She has represented a host of plans and plan sponsors in multiemployer plan community, as well as private sector single-employer plans and a federal health benefit plan, over the course of her career, but she is new to Washington policy circles. Gomez is currently awaiting a confirmation hearing and committee vote in the Senate, so a full Senate confirmation vote is likely still several weeks away. EBSA has been under acting leadership for more than 15 months.

Once Gomez is confirmed, she is likely to jump right into action as the department's agenda includes a host of retirement-related regulatory priorities. Topping the list is the Department of Labor (DOL)'s plan to once again revisit the definition of "fiduciary" in the retirement context. DOL has been wrestling with this issue for a decade. A statement from the Biden administration in June said that the department plans to put forward rules that "more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries."

Another regulatory priority for Gomez will be crafting new regulations around environmental, social and corporate governance (ESG) investing, an increasingly popular investing strategy. The Biden administration announced earlier this year that it would not enforce two ESG-related rules that were finalized late in the Trump administration and would instead propose its own set of rules.

Finally, the 2021 ERISA Advisory Council, a 14-member panel of academics, investment experts, and representatives of employees and employers that provides advice to the Labor Department on retirement-related issues, announced that it would focus this year on two areas: brokerage windows in self-directed retirement plans and gaps in retirement savings based on race, ethnicity and gender. The council meets several times a year, and while its recommendations to EBSA have no legal power behind them, the research and advice often forms the basis for future regulatory initiatives. The council plans to issue reports on both issues later this year.