Senate Finance Committee Reduction in Retirement Savings of Public Education and Government Employees

I have been focused this past week on understanding the impact and implementation of the House Ways & Means and Senate Finance Committee proposals on U.S. businesses foreign source income.  Two proposals that interest me are the ones aimed at transfer pricing, being (1) the minimum deemed distribution of a foreign subsidiary’s earnings above a statutorily defined return on tangible capital and (2) the 20% excise tax on payment to foreign related corporations.

I recognize that the 2017 Tax Reform discussion originally was partly about whether the Code should be used for incentives in favor of an activity or taxpayer.  But the dueling Chamber proposals are now out and tax reform based on equity and on eliminating tax-incentives died on arrival.  It the same old ‘every interest’ vying for a portion of the pie. That’s the democratic, political “Gulchi Gulch” process.  Given that I work at a public academic institution, I have ‘a dog in this fight’ described below. Hope that the government relations staff of NTEU, of state universities, and of other government employee stakeholder groups raise their voices like the Seraphim to the Republican members of the Finance Committee that are willing to listen.

So what’s so alarmed me to divert my attention to the retirement provisions of the Senate Chair’s mark?  Did not the President state that retirement would be left alone? Senate wasn’t listening to him as usual.

The Senate Finance Committee Chair slipped in (at page 178) an explosive measure for government employees that also impacts public academic institutions.  The Senate Finance Committee Tax Reform Chair’s Mark under the current status (November 9, 2017) will limit public employees to one aggregate amount of $18,500 for retirement plans 403(B) and 457 as of January 1, 2018.  Government, including public institution, employees needs to become immediately aware that this provision will critically reduce their ability to contribute to their employer retirement plan(s) by $18,500 (or $24,500 for employees 50 years and older) as of January 1, 2018.   Thus, while there is still time to make December 1st contribution changes to preserve the last year of the additional $18,000 (or $24,000 if at least 50 years of age), these employees need to arrange with their payroll officers to contribute before December 31st any difference between what is allowed in 2017 and what has actually been contributed.  As of January 1, 2018, the ability to contribute is gone forever.

Curiously, I have not found an informative article about the impact of this provision, much less calling for employees to contact their Senator.  Silence from the public university crowd that is usually quite loud although this provision will damage their ability to attract researchers, faculty, and staff from the higher compensation opportunities of private educational institutions and for-profit industry.

Instead of the beneficial retirement system, government agencies and public institutions need to find more revenue to pay competitive salaries and employee benefits to replace the loss of the retirement benefits (doubtful) Senate Finance will take away.  Lacking better salaries, government agencies and public institutions will experience disproportionate employee turnover of the best performing management coupled with a declining ability to attract highly accomplished professionals and researchers to replace the pool.

Perhaps this provision is a Republican payback to government agencies like the IRS because Republicans think that the current government management pool is biased against Republican groups or lacks service for taxpayers?  But taking out the best performing managers will exasperate the challenges, not remediate them.  If this is a ‘payback’, then it is also ‘cutting of one’s nose’.   Perhaps the provision is but a Machiavellian move in a contest for talent between a state university and its private counterpart?

Maybe the silence from the government and public institutions employees is ‘heads in the sand’, and perhaps ‘those in the know’ think this provision will not survive because JCT scored it as only worth $100 million a year at least until 2021 (so why waste the political capital).  Apportioned amongst all government employees in the US (being federal and state), state public academic institutions I suspect are less than 10 percent of this score, thus about $10 million a year for offset (inconsequential basically).  A carve-out from this provision for public educational institutions would address the harmful issue and can be negotiated in response to the proposed loss of the current carve-out for deferrals allowed for section 403(b) plan for at least 15 years of service to an educational organization, hospital, home health service agency, health and welfare service agency, and church.  Albeit seems to me that we want to also incentivize doctors, nurses, social workers, and clergy to stay long-term in their public positions instead of moving to lucrative private industry.

Conformity of contribution limits for employer-sponsored retirement plans 

Present Law: In the case of a governmental section 457(b) plan, all contributions are subject to a single limit, generally for 2017, the lesser of (1) $18,000 plus an additional $6,000 catch-up contribution limit for employees at least age 50 and (2) the employee’s compensation. This limit is separate from the limit on elective deferrals to section 401(k) and section 403(b) plans. Thus, for example, if an employee participates in both a section 403(b) plan and a governmental section 457(b) plan of the same employer, the employee may contribute up to $18,000 (plus $6,000 catch-up contributions if at least age 50) to the section 403(b) plan and up to $18,000 (plus $6,000 catch-up contributions if at least age 50) to the section 457(b) plan.

Finance Committee Chair Proposal: The proposal applies a single aggregate limit to contributions for an employee in a governmental section 457(b) plan and elective deferrals for the same employee under a section 401(k) plan or a 403(b) plan of the same employer. Thus, the limit for governmental section 457(b) plans is coordinated with the limit for section 401(k) and 403(b) plans in the same manner as the limits are coordinated under present law for elective deferrals to section 401(k) and section 403(b) plans.

Hatch Amendment #2 to Chairman’s mark of “Tax Cuts and Jobs Act”
Short Title: An amendment to the catch up contribution rules for section 401(k), 403(b) and 457)(b) retirement savings plans. Description of Amendment: This amendment would require all catch up contributions to section 401(k), 403(b) and 457(b) retirement savings plans to be Roth only, and increase the $6,000 catch up contribution annual limit applicable to such plans to $9,000.

Have a question? Contact William Byrnes

Your comments are welcome!

William H. Byrnes has achieved authoritative prominence with more than 20 books, treatise chapters and book supplements, 1,000 media articles, and the monthly subscriber Tax Facts Intelligence. Titles include: Lexis® Guide to FATCA Compliance, Foreign Tax and Trade Briefs, Practical Guide to U.S. Transfer Pricing, and Money Laundering, Asset Forfeiture; Recovery, and Compliance (a Global Guide). He is a principal author of the Tax Facts series. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, and practiced in Southern Africa, Western Europe, South East Asia, the Indian sub-continent, and the Caribbean. He has been commissioned by a number of governments on tax policy. Obtained the title of tenured law professor in 2005 at St. Thomas in Miami, and in 2008 the level of Associate Dean at Thomas Jefferson. William Byrnes pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school (International Taxation and Financial Services graduate program).

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1 comment on “Senate Finance Committee Reduction in Retirement Savings of Public Education and Government Employees”

  • Yes this is to reduce the retirement benefits to Government employees many who are underpaid. Republican senators in the State and Counties have been doing their best to reduce the compensation paid to public employees. They it is taxpayer dollars that need to be saved. While the senators and elected county officials continue to misuse tax payer dollars for their personal gain. As one county official in Miami Dade stated that employees are there for public service and shou.ld be ready to work for low pay to serve the public. The same elected official took free money from the county towards his college tuition

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