Some Republican lawmakers had floated a proposal of drastically reducing the annual limit on pre-tax contributions to a defined contribution plan. The QPA November newsletter celebrates that the House tax reform bill does not incorporate that proposal. The House bill includes some changes to loans and hardships, but does not touch the annual contribution limits.
The Senate bill also does not include any reductions to the most frequently referenced annual contribution limit. In 2017, section 402(g) of the Tax Code limited deferrals to $18,000. In 2018, that limit will increase to $18,500. Thankfully, the Senate bill does not incorporate the previously floated “Rothification” proposal, which would continue to allow Roth contributions at that level, yet slash the pre-tax limit.
But the Senate bill would impact “catch-up contributions”. Currently, the Tax Code would allow a participant to contribute up to an additional $6,000 if he or she were at least 50 within the year the contribution is made. The Senate bill would remove that capability for people making more than $500,000. Standing alone, that’s not a terribly scary change. Those individuals likely need the additional tax-advantaged savings opportunity less than others.
Some are concerned, however, that this presents a slippery slope. They are worried that the income threshold could lead to further reductions in the income threshold – perhaps to $250,000 or as low as $125,000. The Senate bill also would make changes to special catch-up rules for 403(b) and governmental 457 plans. Expect ongoing dialogue, as the two houses attempt the unenviable task of reducing personal and corporate income tax rates without cutting the programs that require the tax revenue in order to continue.