The Senate’s economic stimulus agreement is expected to allow companies to put off pension contributions and workers to access retirement savings penalty free, while also correcting two of the most embarrassing drafting errors in the 2017 tax code overhaul.
It would also provide a long-sought fix to allow workers to exclude student loan repayment assistance from their employers from their taxable income, similar to the current treatment for employer-provided tuition aid. Senate Minority Leader Charles E. Schumer, D-N.Y., and other Democrats touted that provision in the emerging agreement.
The bill also would relax rules on taking out loans against retirement savings and waive a $13.50 per proof gallon federal excise tax paid by distillers on alcohol that they use to make hand sanitizers, according to a draft of the legislation circulating Wednesday. That would be a pleasant surprise since lobbyists as of Tuesday hadn't expected the language to make it into the final version, and it was left out of prior iterations.
Perhaps the most important retirement feature expected to be in the bill is allowing companies to delay required pension plan contributions until the end of 2020, said Lynn Dudley, senior vice president at the American Benefits Council, which represents the country’s largest employers on benefit matters.
“That gives companies flexibility” though they’ll have to pay interest, she said. “It puts cash in companies’ hands now.”
The centerpiece of the tax title remains the inclusion of direct payments to households: up to $1,200 for individuals and $2,400 for joint filers, with an extra $500 per child.
Those amounts phase out by 5 percent of adjusted gross income above $75,000 for single filers and $150,000 for married couples. So a family of four earning $200,000 would see their credit reduced to $900 from the maximum $3,400.
Two drafting errors in the 2017 tax bill would be fixed to help retailers, who were suffering from stiff competition from Amazon.com even before COVID-19 spread, and are now seeing far less foot traffic as a result of people staying home.
One mistake in the 2017 law prevents retailers and restaurants from depreciating building improvements in a single year, as intended in the 2017 bill. Instead, these establishments must depreciate improvements over an embarrassingly long 39 years, which supporters of the fix and economists say has led to businesses delaying improvements.
That would be corrected in the forthcoming stimulus package, at least according to recent drafts circulating.
Then there's a fix for companies' deductions for net operating losses. In the 2017 law, Republicans meant to prospectively limit the ability of firms to claim tax breaks on "NOLs," which occur when deductions exceed income.
But they didn’t mean to apply the limitation retroactively, which is what happened when drafters mistakenly eliminated loss carrybacks to tax years “ending” after Dec. 31, 2017, rather than “beginning” after that date.
Firms that had fiscal years ending March 31, 2018, for instance, lost the ability to claim carrybacks extending back to the second calendar quarter of 2017. Companies including PetSmart, Nissan and retailer Charming Charlie, which all have non-calendar fiscal years, lobbied on the issue.
That fix is part of a broader benefit to all companies that are now experiencing losses as a result of the coronavirus-inflicted downturn. The measure would allow loss carrybacks for up to five prior years, so companies could use their losses to offset prior taxes paid when they were profitable, resulting in large refund checks from the IRS.
The package would also give companies a break on new limits on deductions for interest expenses imposed under the 2017 law, and also provide some relief for firms that can't access the generous first-year expensing provisions in that law due to reductions in taxable income.
The bill includes an employee retention tax credit on wages up to $10,000 per employee per quarter kept on an employer’s payroll through the end of 2020. Companies eligible for the tax credit must have fully or partially suspended operations due to a government order and suffered a significant decline in revenues.
As an additional incentive to keep workers on staff, the measure would allow companies to defer the 6.2 percent Social Security tax on all wages up to $137,700 for the rest of the year, though they'd have to pay it back in equal installments in 2021 and 2022. What they owe, though, would be reduced by the tax credits earned by keeping employees on their payroll.
"This is about helping our workers keep their jobs," Senate Finance Chairman Charles E. Grassley, R-Iowa, said in a statement. "Our economic relief package has provisions to help businesses so they have the cash to keep the doors open and keep making payroll."
As with other disasters, Congress will allow no-penalty hardship withdrawals from 401(k)s and other retirement plans as Americans struggle to find cash to make it through the coronavirus pandemic.
The draft of the legislation contains relaxed rules for taking out loans against retirement savings, for deducting charitable contributions and for taking required minimum distributions from retirement plans.
The hardship section not only waives the 10 percent early withdrawal penalty from a retirement plan but gives those who make withdrawals three years to return the money to their plan.
Another provision would loosen rules and raise limits for those who wish to take out loans against their retirement savings. In the case of a loan, the individual remains invested in the market and would enjoy any potential bull market that could occur following the crisis. Those who make hardship withdrawals would miss out on investment gains if the markets rise.
“That’s the whole idea” behind the loans and both the three-year payback period and the expanded catch-up provisions that appear to have made their way into the bill, said Dudley.
The draft also contains a provision to waive required minimum distributions for a year. In a letter to Senate leadership last week, the benefits council argued that these distributions had been suspended after the 2008 financial crisis and there’s a bigger need for this flexibility in the current crisis.
The example given was for a retiree of a certain age who is required to take out 5 percent of their plan’s balance each year. If the required distribution is based on the balance as of Dec. 31, 2019, that balance may have shrunk precipitously since then. A $100,000 balance may well have shrunk to $80,000, but the retiree would still be required to take out $5,000, possibly endangering the long-term ability of that pension to meet the retiree’s needs.