Call it a case of legislative déjà vu. A potential follow-up to 2017’s historic Tax Cuts and Jobs Act (TCJA) could throw HR and payroll professionals for a loop later this year.
Last week, House Ways and Means Committee Chairman Kevin Brady (R-Texas) released a framework that would reinforce and expand on last year’s tax changes. Nicknamed “Tax Reform 2.0,” the framework would also expand access to certain retirement savings plans. The House is expected to vote on a bill derived from Brady’s proposal next month.
Tax Code Changes
Last year’s tax law hit the reset button on existing tax brackets (you can read our full recap here). These updates, which resulted in a tax cut for certain brackets, have an expiration date of 2025. Brady’s proposal would seek to preserve these changes indefinitely.
In addition to the above, Brady also suggested something that might give payroll professionals cold sweats: instituting a mandate that Congress consider updating the tax code every year. In the proposal, he writes:
“Tax Reform 2.0 is a new commitment to improve the tax code each and every year for American families and local businesses—like upgrading the apps on your phone...Each year Congress will examine the tax code and take action to ensure our tax code continues to be competitive, innovative, and always better.”
There might be one party even less enthused by the prospect of annual changes: the IRS. Last year’s overhaul resulted in what agency administrators described as their most difficult year ever. In total, over 140 IRS systems and 492 forms and processes had to be overhauled as a result of the TCJA.
New Savings Plans
Brady’s framework also suggests a number of changes relating to both retirement plans and savings accounts.
Currently, withdrawing from a retirement account early carries a heavy tax penalty. One of the proposals included in Tax Reform 2.0 would allow families to withdraw from their 401(k), penalty-free, to cover childcare costs after a recent birth or adoption. With election season right around the corner, this family-friendly provision could be viewed as a strategic win for Republican lawmakers up for reelection.
Brady also proposed allowing individuals to contribute to new, tax-advantaged accounts he calls Universal Savings Accounts (USAs). These would function like Roth IRAs, where account holders can contribute post-tax funds and allow them to grow tax-free. Individuals would be able to contribute up to $5,500 per year and spend it on whatever they please without incurring a withdrawal penalty.
It remains to be seen whether Tax Reform 2.0 will cross the finish line. While the GOP holds a comfortable majority in the House, it has little wiggle room in the Senate. Election season could also dissuade conservatives from rocking the boat with another sweeping tax bill. The Namely team will monitor the proposal as it comes to a vote in September.