Retirement savings still a potential target in tax reform negotiations

The Trump administration intends to leave retirement savings untouched as part of its new tax proposal, but some remain concerned employer-sponsored plans won’t survive the tax-reform process unscathed.

“We’re pleased with the framework that protects retirement accounts, but we remain concerned with congressional proposals floating out there that could still attack retirement accounts,” said Will Hansen, senior vice president of retirement policy at the ERISA Industry Committee, a nonprofit association for large plan sponsors.

The tax plan unveiled Wednesday outlined steep reductions in individual and corporate tax rates, and the elimination of the estate tax and alternative minimum tax.

Since defined-contribution plans represent one of the federal government’s largest tax expenditures, retirement industry stakeholders have feared savings incentives for plan participants may be amended to pay for proposed tax cuts.

But Gary Cohn, the director of the National Economic Council, said during a press conference Wednesday that tax provisions around retirement savings, as well as homeownership and charitable giving, “will be protected, but other tax benefits will be eliminated.”

Those being eliminated include many itemized deductions.

However, leaving retirement plans untouched may be easier said than done, observers said.

“If you’re going to make big tax cuts revenue-neutral, you’d have to make some very bold steps,” said Michael Hadley, partner at Davis & Harman, a lobbying firm for financial services organizations.

“There are lots of options available to use the retirement savings system as a piggy bank, unfortunately,” he said.

According to estimates from the Joint Committee on Taxation published in January, defined-contribution plans will cost the federal government nearly $584 billion in lost tax revenue over 2016-20.

The House Ways and Means Committee will rely on figures from the Joint Committee on Taxation to determine where it can generate revenue for tax cuts, Mr. Hansen said.

Of course, this supposed “lost” revenue only appears lost due to a budgeting gimmick, observers said. The government eventually recoups tax revenue from these pre-tax deferrals decades in the future when individuals retire, but the revenue falls outside the 10-year budget window Congress uses for tax scoring.

Mandating some level of Roth contributions in place of pre-tax contributions by participants is one of the primary ways Congress is considering altering the current tax structure of DC plans, observers said. That would put more of the tax revenue within that 10-year tax window.

“That, in and of itself, would raise hundreds of billions of dollars,” Mr. Hansen said. He’s heard discussions on Capitol Hill ranging from mandating 100% Roth contributions, 50% pretax and 50% Roth, and the first $2,500 or so of contributions being pre-tax with the remainder as Roth.

However, Congress also could try freezing annual contribution limits for 10 years, rather than providing a cost-of-living adjustment, which would effectively cut the contribution limit over time. Annual 401(k) contribution limits are currently $18,000, with a catch-up contribution of $6,000 for participants ages 50 and over.

“Given the fluidity of these conversations, we’re not taking anything for granted,” said Brian Graff, executive director of the National Association of Plan Advisors and CEO of the American Retirement Association. “This show is far from over.”

A tax plan released a few years ago by then-Ways and Means Committee chair David Camp, a Michigan Republican, would have frozen limits for a decade and called for mandatory Roth contributions above a certain contribution threshold.

While the Camp draft isn’t necessarily the operative one for Republicans at this point, and received a lot of criticism at the time it was proposed, “there are a lot of ideas in the Camp draft that can be pulled off the shelf” to help pay for tax cuts, Mr. Hadley said.