Plan Sponsors: What You Should Know About the New Tax Bill. With the passage of the recent tax reform bill, here’s a breakdown of what employers need to know about its impact on retirement plans, from Employee Benefit News:
- On the table was a cap of $2,400 on pre-tax contributions to workplace retirement plans, with any savings above and beyond that required to be allocated to an after-tax Roth 401(k) — a process dubbed “Rothification.” The pre-tax contribution limit for 2018 is $18,500 — so obviously, these provisions’ passage would have made a big difference. They were dropped before the House bill was released in November, and never a part of the final bill that went to the Senate.
In short, they were a no-deal — for now. There is some concern that now that Rothification has been a part of the discussion, it could resurface at some point. A majority of industry watchers agree that, obviously, it’s not such a great idea for American workers to be able to put aside less of their income on a before-tax basis.
- Also originally included in the House version of the bill was a provision for immediate taxation of earnings saved in non-qualified deferred compensation plans. Another proposal under discussion was the Rothification of catch-up contributions for workers age 50 and older — so again, they would be set aside as after-tax money instead of before-tax savings in a traditional 401(k) plan. These provisions never made it to the final House or Senate bills.
- Small business retirement plans are also potentially impacted by a provision included in the final tax reform bill. According to Employee Benefits News:
“The bill increases the deduction for qualified business income of pass-through entities to 20%. That means that pass-through businesses, like S corporations, would pay a lower tax rate by excluding as much as 20% of their business income from taxation. Retirement plan contributions are generally deducted against the S corporation’s business income, which under this provision, would be much lower than the income tax rate S corporation owners pay on retirement savings when they retire.”
At issue is that the way the law is written, it makes it less attractive for small business owners to save for retirement and offer plans for their employees.
- Another provision included in the final bill is a positive in that it may help sponsors with plan leakage issues. It allows workers who leave their current employer with an outstanding retirement plan loan to avoid being taxed on the loan amount if they contribute the balance to an IRA before their individual tax return is due. Under current regulations, workers have just 60 days to make that rollover before they face a tax penalty on the loan amount.
- Finally, the House bill originally contained a proposal to relax hardship withdrawal rules, but that provision was eliminated from the final bill.
The message here is that while there were some provisions that did not pass, sponsors should be vigilant and continue to pay attention to future legislation. It’s clear Congress has an interest in making changes, and that may someday include sweeping changes to our retirement system that may or may not be in employees’ — or employers’ — best interests. For now, the changes are relatively minor, so the best course of action is to keep watch and stay tuned.
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