Senate Democrats Fight IRS Ban on SALT Deduction Cap Workarounds

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Senate Democrats are attempting to nullify the recently finalized Treasury and IRS rules prohibiting state workarounds to the new federal $10,000 limit on state and local tax (SALT) deductions.

Senate Minority Leader Chuck Schumer, D-N.Y., led the introduction on July 16 of S.J. Res. 50 under the Congressional Review Act to “restore states’ ability to work around the harmful caps, and allow homeowners to again fully retain their SALT deduction.”

Shortly after the SALT deduction cap was enacted under the sweeping 2017 tax law, New York and New Jersey passed laws allowing taxpayers to recharacterize most state and local taxes as a charitable contribution to a specific fund that would then qualify for a federal tax deduction and state tax credit.

The senators note that while the Treasury Department blocked states’ workarounds for individuals, Treasury in September 2018 issued guidance that allowed businesses to continue to benefit from these same workarounds.

Schumer said Thursday in a media conference that Senate Democrats would attempt to overturn the rule through the Congressional Review Act, which gives Congress 60 legislative days for both chambers to repeal the rule. The IRS issued the final rules in mid-June. They will be effective Aug. 12.

“As if the Trump-Republican tax bill wasn’t already bad enough for middle-class families, these new IRS regulations are another kick in the gut to homeowners in New York State and across the country,” said Schumer in announcing the resolution. “The IRS is seeking to deny hardworking homeowners the benefit of the full SALT deduction while continuing their tax giveaway to the wealthiest few and corporations.”

The senators, Schumer said, are “fighting back with a CRA Resolution of Disapproval, which is guaranteed a majority threshold up-or-down vote, [and] would overturn the IRS’ recent attempt to block states from implementing workaround plans, and would allow homeowners to again fully receive this tax benefit.”

The CRA, added Sen. Bob Menendez, D-N.J., “will reverse the flawed guidance issued by the IRS last month, which crippled state-level efforts to protect middle-class families from even higher property tax burdens.”

Menendez has also introduced the SALT Act, which would “fully reinstate the property tax deduction” and restore the 39.6% individual income tax rate bracket.

Democrats Float Bill to Help Workers in Closed Pension Plans

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Sens. Rob Portman, R-Ohio and Ben Cardin, D-Md., members of the Senate Finance Committee, introduced legislation Thursday to protect workers in closed defined benefit plans from having their benefits frozen by Jan. 1, 2020.

Portman and Cardin said that The Retirement Security Preservation Act of 2019 (RSPA) — which is included in the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019, that’s tied up in the Senate — amends and modernizes the pension nondiscrimination rules that apply to these single-employer pension plans.

The most recent estimate from the American Benefits Council finds that at least 450,000 Americans are at risk of losing future pension benefits by Jan. 1, 2020, if a solution is not reached, the senators noted.

“Some plans have already been forced to freeze due to Washington’s inaction,” they said.

The senators “are pleased that the legislation is included in the Secure Act, but we are introducing it as a standalone bill as well to send a message about its urgency,” Portman said. “Older workers in these affected closed defined plans deserve relief before it’s too late.”

Added Cardin: “While I maintain my belief that the Senate should pass the Secure Act now, we have an obligation to act immediately to prevent a further loss of benefits for workers affected by this provision. Congress must act immediately to give workers, especially those closer to retirement, the certainty they need to make decisions and plan their lives — be it passing the Secure Act or passing this standalone bill.”

The senators explained that some companies that have moved from defined benefit plans to defined contribution plans have elected to grandfather existing employees by closing their traditional DB plans (also known as “soft freezing”); other companies have “hard frozen” their traditional DB plans but assisted existing employees in other ways, such as through enhanced DC plan contributions.

“When a plan closes, existing participants or a subset of participants continue to earn benefits under the traditional DB plan,” the senators said. “When a plan is ‘hard frozen,’ employees earn no new benefits under the plan.”

Lynn Dudley, senior vice president, global retirement and compensation policy at the American Benefits Council, applauded Portman and Cardin’s bill.

“For the better part of a decade, we have been urging lawmakers to address the quirk in the nondiscrimination rules that effectively compels pension plan sponsors to stop making contributions for older, long-service workers. Now, the stakes have never been higher,” Dudley said in a Thursday statement.

She went on to explain that when employer sponsors of traditional defined benefit pensions “soft freeze” their plans (close them to newly hired employees), they typically want to allow older, long-tenured employees to continue accruing greater pension benefits for the duration of their employment.

However, as these grandfathered participants in the pension plan age and advance in the company, the plan can inadvertently be subject to regulations prohibiting discrimination in favor of “highly compensated” employees, Dudley said.

“This glitch in the nondiscrimination rules effectively penalizes employers for trying to ‘do the right thing’ for their older workers,” she argued. “It is compelling some employers to ‘hard freeze’ their plans by ceasing accruals. This is something nobody wants to see happen,” Dudley said.

Dudley also said the RSPA bill improves on existing Treasury Department guidance by updating the testing rules while providing targeted relief to the many pension plans trapped by current law.

“The RSPA is bipartisan, inexpensive and incredibly urgent,” Dudley said. “We strongly encourage Congress to address this issue as soon as possible.”