A new comprehensive tax reform proposal was introduced by House Ways and Means Committee Chairman Dave Camp on February 26th, 2014. Camp’s proposal would cut the tax rate for C corporations to 25% over a period of five years. It would also cut individual tax rates to two brackets (10% and 25%), but it would add a 10% surtax on high income taxpayers.
Of interest to the ESOP community is the fact that Camp’s proposal would cut in half the maximum pre-tax annual contributions that could be made to certain defined contributions plans, including 401(k) plans but not including ESOPs. According to House Speaker John Boehner, however, it is not likely that the Camp proposal will be voted upon during 2014.
Subsequently, on March 4, 2014, President Obama released his 2015 Budget proposal, which includes a proposal to cap Section 401(a) plan retirement accounts to $3 million per individual. Since an ESOP is a 401(a) plan, this proposal would limit ESOP accounts to $3 million per individual. Another provision in the President’s budget would repeal Section 404(k) of the IRC, which allows C corporations to deduct dividends on shares of Company stock held by an ESOP if these dividends are used to repay an ESOP loan, or if these dividends are passed through to ESOP participants.
Speaker Boehner, however, has stated that the House will propose and pass its own budget later this year, so it is not likely that the President’s budget proposals will gain any traction in the House.