The retirement industry can breathe a collective sigh of relief today as the House and Senate tax bills
advance in their respective chambers.
Despite all the doomsday talk relative to setting strict limits on pre-tax 401(k) contributions and gutting non-qualified deferred compensation plans, retirement savings has largely emerged unscathed and intact.
"Those fears didn't come to pass. For the most part, the retirement system was spared," Kevin Walsh, an associate at Groom Law Group, said. "Whereas two weeks ago there was a fair amount of terror … it's looking better."
In the weeks and months leading up to early November, when the House
released the Tax Cuts and Jobs Act, the Trump administration and congressional Republican leaders had
telegraphed a few tax breaks that would be preserved: namely, those affecting retirement savings, charitable giving and mortgage interest payments.
FUNDING GAP
Despite that proclamation,
concern began to grow that Republicans would limit pre-tax 401(k) contributions, to as low as $2,400 from the current $18,000 threshold, and mandate savings beyond this limit go to Roth accounts. That would help Congress offset the revenue loss from its tax-cut agenda.
The debate came to a head when President Donald J. Trump
signaled in a Twitter message that there would be "NO change to your 401(k)."
The so-called "Rothification" didn't come to pass, either in the bill that passed the House or the one that passed the Senate Finance Committee, both of which occurred Nov. 16.
The closest it came to emerging was in a proposed
amendment filed by Sen. Orrin Hatch, Republican from Utah and chairman of the Finance committee, that would have required catch-up contributions for those over age 50 to be made to Roth accounts. That provision didn't make it into the amended Senate bill that passed the committee.
"The industry should feel really good about how it came together and was able to fend off efforts to use the 401(k) system as a piggy bank to pay for corporate tax cuts," Brian Graff, CEO of the American Retirement Association, said.
SURPRISE PROVISIONS
However, Congress sent shock waves through the retirement community through surprise provisions in both chambers' bills that essentially flipped the tax treatment of non-qualified deferred compensation plans on its head.
That would have ended tax deferral in vehicles such as "401(k) mirror plans," often used by company executives to save money above 401(k) contribution limits, and would have essentially rendered such plans pointless, Mr. Graff said.
However, the provision was ultimately stricken from both bills.
"It looks for now that the other big bullet that was coming for the industry was left out," Mr. Walsh of Groom Law Group said Thursday at a Worldwide Employee Benefits Network event in New York.
RECHARACTERIZATIONS
The tax treatment of retirement savings has emerged with at least one black eye, though: both chambers would
repeal use of recharacterizations of Roth IRA conversions. Under current law, taxpayers who convert a pre-tax IRA to a Roth account have the ability to undo, or recharacterize, it within a certain time frame.
And it's not assured issues around pre-tax savings and deferred compensation won't re-emerge as the tax debate continues and Republicans try to get a bill to the president for signature by year's end.
"I think these bills, they're trying to cut taxes in other areas, and that costs money," John Scott, director of retirement savings at The Pew Charitable Trusts, said. "There's a concern that things could change. We're still only partly through the process."
