November 19, 2021

The social spending and climate bill passed by House Democrats Nov. 19 would ban Roth conversions of after-tax contributions in employer retirement plans starting next year and impose a new corporate minimum tax based partly on the performance of affected employers’ defined benefit (DB) pension plan assets. The Build Back Better Act (BBBA) (HR 5376) would also cap combined defined contribution (DC) plan and individual retirement account (IRA) balances for high earners and impose new restrictions on conversions and rollovers to Roth accounts and Roth IRAs. However, lawmakers stripped out earlier provisions substantially expanding the saver’s credit and requiring employers without retirement plans to offer automatic-enrollment DC plans or IRAs.

Limits on Roth conversions, large account balances

Retirement-related revenue-raising provisions in the bill include:


  • Roth conversions of after-tax contributions prohibited. Conversions of employee after-tax contributions in qualified retirement plans (and nondeductible contributions in IRAs) into Roth-designated accounts or Roth IRAs would be prohibited, starting in 2022.

  • All Roth conversions banned for high earners. Roth conversions — including ordinary rollovers — would be prohibited for high-income taxpayers (individuals earning at least $400,000–$450,000, depending on their filing status), starting in 2032.

  • Contribution limit and mandatory distributions for large account balances. High-income taxpayers with combined DC plan and IRA balances exceeding $10 million (annually indexed) could not make additional contributions to a traditional or a Roth IRA, starting in 2029. These individuals would also face mandatory minimum distributions for accounts exceeding $10 million (annually indexed) and immediate distributions from Roth accounts if aggregate balances in tax-preferred accounts exceed $20 million (annually indexed).

  • Employer reporting duties. Beginning in 2029, employers would have to report DC account balances exceeding $2.5 million (annually indexed) to the IRS, regardless of the individual’s employment status or income level.

Corporate minimum tax raises concerns for DB plans

The bill includes a controversial 15% minimum corporate income tax on entities with accounting income exceeding $1 billion, effective next year. DB pension plan sponsors are concerned because this tax would apply to any accounting pension income and effectively eliminate tax deductions for plan contributions.


The tax would be based on income reported on a company’s financial statement or “book income,” including gains and losses in DB plans. This could subject affected DB plan sponsors to volatile tax liabilities due to fluctuations in the value of plan assets and interest rates. Companies that have adopted “mark-to-market” accounting standards could be hit especially hard by these changes.


The American Benefits Council and other employer groups are urging lawmakers to preserve current income tax rules for DB plans and other postretirement benefit plans (such as retiree health plans).


Rocky road ahead as employers seek changes

House Democratic leaders had planned a vote weeks ago but delayed it at the request of some deficit-wary moderates who wanted to see official Congressional Budget Office (CBO) estimates of how much the measure will cost and how much will be offset by new revenues. Those concerns mostly abated after CBO projections showed new revenues would largely pay for the roughly $1.75 trillion package.


The BBBA, a top priority for President Biden, now heads to the Senate, which will likely make major changes and shrink the overall size of the bill. Contentious negotiations lie ahead as Senate Democrats try to resolve deep differences between progressives and moderates over various BBBA provisions. Democrats need all of their 50 senators to pass a bill under the budget reconciliation process, which requires a simple majority instead of the usual 60 votes. The reconciliation process also requires the legislation to have direct ties to the federal budget, so the Senate parliamentarian could knock out some provisions.


Both chambers must pass identical legislation for the president’s signature, so negotiations over the package’s final size and scope will likely continue into late December and could spill into 2022. That might push out to 2023 the effective date for the bill’s corporate minimum tax provisions and ban on Roth conversions of after-tax contributions in qualified plans and IRAs. Nonetheless, the bill’s retirement and tax proposals stand a good chance of surviving in any final deal.


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