Tax reform: Retirement industry dodges bullet as Senate and House bills advance

Concerns over strict limits on pre-tax 401(k) savings and the upending of non-qualified deferred compensation plans are receding

Nov 17, 2017 @ 1:25 pm

By Greg Iacurci

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."

0
Comments

What do you think?

View comments

Recommended for you

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

May 02

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

What investment tools should you add in 2018?

As you look ahead to 2018, what types of financial products would you like to add to your quiver? Financial advisers at the MarketCounsel Summit offered their perspective, but one thing is clear "choice is power."

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Tax update: Brady says sales tax deduction in final bill

Taxpayers will be able to deduct state income taxes or state sales taxes in addition to property levies — up to a $10,000 cap.

Critics say regulation hasn't curbed overly rosy projections for indexed universal life insurance

They say rule didn't go far enough and more stringent measures may be necessary.

Broker, retirement groups make last-minute pleas to change tax legislation

Pass-through provisions are target of groups representing employee-model brokerage firms, as well as retirement plan advisers.

House and Senate reach tentative compromise for tax overhaul

Lawmakers still need to get a cost analysis of their agreement, so it's not yet definite, according to a source.

Advisers' biggest fears for 2018

What keeps advisers up at night.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print