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Congress discussing compensation, benefit and tax changes

Benefits Administration and Outsourcing Solutions|Executive Compensation|Health and Benefits|Retirement|Total Rewards

By Ann Marie Breheny , William “Bill” Kalten , Kathleen Rosenow and Steve Seelig | October 4, 2021

The budget reconciliation package moving through Congress has important implications for U.S. employee benefit programs and executive compensation.

Significant benefit and compensation provisions are wrapped into a budget reconciliation package that is moving through the U.S. House of Representatives. The package also includes tax changes that have important implications for benefit programs and executive compensation. Though this legislation is still in the early stages of discussion and the provisions are subject to change, benefit and compensation provisions seem likely to be included if the legislation is enacted. Budget reconciliation is an important legislative vehicle because budget reconciliation procedures allow legislation to move through the U.S. Senate with a 51-vote majority rather than the 60-vote majority usually required to ensure Senate approval.

Paid family and medical leave

The House Ways and Means Committee approved a paid family and medical leave program that includes grants to employers. Under the Ways and Means Committee proposal, the program would provide up to 12 weeks of paid family and medical leave to qualifying caregivers.

The program would be available to all workers who meet qualifying leave and earnings requirements, regardless of full-time, part-time, independent contractor, self-employment or other employment status and regardless of whether the individual’s employer is subject to the Family and Medical Leave Act. The program would be funded through general governmental appropriations and, generally, would not impose new payroll taxes or other assessments on employers or employees.

Leave would be available to address one’s own serious medical condition; care for a family member with a serious medical condition; care for a newborn or newly adopted child, or a child who has been placed for adoption or foster care; and other purposes. Under the program, family members would include a wide range of individuals, including spouses, domestic partners, siblings, grandparents, grandchildren, spouses of family members and others whose relationship by “blood or affinity” is equivalent to a family relationship. Payments from the program would vary based on income and would pay higher reimbursement rates to lower-income individuals.

Employers that provide qualifying paid family and medical leave benefits and meet other requirements receive federal grants to reimburse some of the costs of the benefit. In general, the grants would reimburse up to 90% of the cost of the benefit. In addition, states that have enacted paid family and medical leave mandates before the federal legislation is enacted could enforce those mandates and would be eligible for federal grants. After 2025, state programs would have to meet new minimum federal requirements.

The Senate is also expected to discuss paid family and medical leave as part of its budget reconciliation legislation, though the Senate provisions may differ from these provisions approved by the House Ways and Means Committee.

Retirement provisions

New savings incentives and revenue raisers

The House Ways and Means Committee approved several provisions with implications for retirement plans, including provisions to expand automatic retirement savings, expand the saver’s tax credit, limit aggregate retirement savings accumulations and limit Roth individual retirement account (IRA) conversions.

  • Automatic enrollment: In general, employers that do not have a retirement savings plan before the legislation is enacted would be required to maintain an automatic contribution arrangement that meets specified requirements or facilitate automatic payroll deductions to IRAs. Employees would be enrolled at a contribution rate of 6% to 10%, and contributions would escalate at least one percentage point annually to at least 10% (but generally not more than 15%) unless they opt out or elect different contribution amounts. Employer contributions would not be required.
  • Saver’s tax credit: The saver’s tax credit would be modified to provide a credit of 50% of the first $1,000 in retirement contributions for taxpayers with income up to $25,000 for single filers, $50,000 for joint filers and $37,500 for heads of household. The credit percentage would then phase down as income increases. The credit would be paid as a contribution to a Roth IRA, a Roth account in an employer-sponsored plan or an ABLE account. If an individual does not designate an account, or the individual’s plan or IRA does not accept the contributions, they will be held by the IRS and receive interest until they can be transferred to a plan or IRA.
  • Limit on aggregate retirement savings contributions: In general, the legislation would impose a $10 million cap on aggregate vested balances in IRAs and defined contribution plans for single tax filers with income exceeding $400,000 ($450,000 for joint filers and $425,000 for heads of household), and distribution of amounts that exceed the cap would be required. Plans would be required to report account balances exceeding $2.5 million to the IRS.
  • Limits on Roth conversions: In general, current law allows “backdoor” Roth conversions, which are accomplished either by converting after-tax contributions to a traditional IRA to a Roth IRA or by converting after-tax contributions to a defined contribution plan to a Roth account within the plan. The Ways and Means Committee proposal would eliminate such conversions by prohibiting rollovers of after-tax amounts to Roth IRAs or Roth accounts held in qualified plans. Furthermore, higher income taxpayers ($400,000 for single filers, $450,000 for joint filers and $425,000 for heads of household) would be prohibited from implementing Roth conversions after 2032.

The legislation also includes provisions addressing IRA investments and other issues. Some of these provisions, such as the automatic enrollment mandate and expansion of the saver’s tax credit, are also included in pending bipartisan retirement savings legislation. The limits on plan accumulations and Roth conversions are aimed primarily at raising revenue to offset other provisions in the budget reconciliation package.

Health care provisions

ACA subsidies and Medicare benefits

Budget reconciliation proposals approved by House committees include provisions addressing Affordable Care Act (ACA) affordability and premium tax credits, Medicare benefits, mental health parity and prescription drugs.

  • Premium tax credits and related provisions: The American Rescue Plan Act (ARPA), which was signed into law in March, expanded ACA premium tax credits for 2021 and 2022, in part by allowing more individuals to be eligible for the tax credits and reducing the maximum amount of household income that credit-eligible households must pay toward their premiums. The House Ways and Means budget reconciliation legislation would make these changes permanent. In addition, it would permanently reduce the affordability threshold for employer-sponsored coverage to 8.5% (from 9.83% for 2021). Another provision would allow low-income households to qualify for premium tax credits even if the employer offers affordable coverage, though employers would not be subject to employer shared responsibility penalties in such cases. ACA provisions are expected to remain under consideration as the budget reconciliation package moves forward. A separate temporary health coverage tax credit for health care premiums paid by those receiving Trade Adjustment Assistance or whose pension benefits are paid through the Pension Benefit Guaranty Corporation would be made permanent.
  • Medicare: The House Ways and Means Committee proposal would add vision, hearing and dental benefits to Medicare. As the proposal moves through the Senate, a proposal to reduce the Medicare eligibility age could also come under discussion.
  • Mental health parity: Budget reconciliation provisions approved by the House Education and the Workforce Committee would impose civil monetary penalties for violations of the Mental Health Parity and Addiction Equity Act.
  • Prescription drugs costs: A proposal to allow the Secretary of Health and Human Services to negotiate the cost of certain prescription drugs and make the negotiated price available to commercial and group health plans as well as Medicare beneficiaries was struck by the Energy and Commerce Committee but approved by the Ways and Means Committee. Backing from the Ways and Means Committee may help keep the provisions in the legislation as it moves to the House floor, but the outlook for the price negotiation provisions is unclear.

Other provisions

ARPA expanded the number of individuals subject to the $1 million compensation cap under Internal Revenue Code section 162(m), beginning in 2027. The House Ways and Means Committee proposal would accelerate the effective date to 2022.

ARPA increased the limit for dependent care flexible spending arrangements to $10,500 for 2021. The Ways and Means Committee proposal would make the increase permanent and index the limit annually for inflation.

The committee proposal also includes significant tax changes. Among other provisions, it would:

  • Increase the corporate tax rate: The tax rate would increase to 26.5% for corporations with revenues exceeding $5 million.
  • Reinstate the top individual tax rate: The 39.6% top tax rate would be reinstated for single tax filers with income over $400,000. The threshold for joint filers would be $450,000, and heads of household would be subject to the top rate for income exceeding $425,000.
  • Increase the capital gains rate for higher-income taxpayers: For those subject to the top tax rate, the capital gains tax rate would increase to 25%, from 20% under current law.
  • Impose surtaxes on higher-income surtaxes: Individuals with income of $400,000 or more ($500,000 for couples filing jointly) would be subject to the 3.8% net investment income tax on their income or net investment gains regardless of whether the taxpayers materially participated in the trade or business that generated the income or gain, unless the money is otherwise subject to payroll or self-employment tax. A 3% surtax would be imposed on those with income exceeding $5 million. In addition, the 3.8% net investment income tax would be expanded to include all net income or net gain that is not subject to FICA or to self-employment tax, regardless of whether the individual materially participated in the trade or business that generated the money.

Going forward

The budget reconciliation legislation is in its early stages, so these provisions could change or drop out of consideration as the legislation moves forward. However, the current $3.5 trillion price tag associated with the legislation will require substantial offsetting revenue, and the House committee proposals indicate that tax increases and some benefits and compensation provisions may serve as revenue raisers for the legislation. Other provisions approved by the House committees represent important policy priorities for key lawmakers.


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