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Tax reform markup to begin in House on Monday

The House Ways and Means Committee said Friday it plans to act on the Republicans' ambitious tax reform legislative proposal on Monday.

The proposed Tax Cuts and Jobs Act unveiled Thursday brought relief to advocates for retirement savings incentives that were left untouched, but criticism from college endowment officials, who would see a new tax on investment income. It also brought some mixed news for investment firms.

On retirement savings, the Republican plan recognized the popularity of 401(k) plans and IRAs, and avoided controversy by making no changes to contribution levels. It also calls for changing the rules for 401(k) hardship withdrawals to allow people to take more money out but keep contributing. People with loans who leave an employer could also roll over their loan repayment to an IRA instead of paying a penalty.

On the flip side, the proposal would effectively end non-qualified deferred compensation plans that employers offer to higher paid workers as a way to save more for retirement outside a regular defined contribution plan. It would also no longer allow tax-exempt organizations, such as non-profits and endowments, from sponsoring a 457(b) non-qualified plan.

"If this whole tax proposal is to encourage economic growth, the last thing you would want to do is to deplete investments," Robyn Credico, defined contribution practice leader for Willis Tower Watson, said in an interview.

The Republican plan gives private foundations a small tax cut by reducing the excise tax on net investment income to 1.4% from 2%, but gives private colleges and university a new tax bill for their endowments' investment income. Those with at least 500 students and assets of more than $100,000 per student would have to pay 1.4% on net investment income; state colleges and universities would not be subject to the tax.

In addition to reducing the corporate tax rate to 20% and preserving lower rates on capital gains, dividends and interest income plus the carried interest exemption, the proposal caps the tax on pass-through business income for partnerships such as private equity businesses to 25%, down from the current individual rates up to 39.6%.

Businesses could immediately write off capital investment expenses, and overseas profits would have a one-time tax to remove the tax incentive for keeping money offshore, the document said.

Private equity and real estate investment firms would lose some of their deduction for interest expense, which would be capped at 30% of income, but the remaining amount could be carried forward for five years.

Committee Chairman Kevin Brady, R-Texas, said in a statement that once markup begins on the House bill, he will offer an amendment "making more substantive improvements to the bill." That final bill will then be reviewed by the Senate, where the Senate Finance Committee will begin work on its own proposal, and tax reform watchers are bracing for plenty of twists and turns before a final deal is reached.