You may have heard some unsettling rumors about dramatic changes to 401(k) and 403(b) plan savings limits. Late last month, word leaked that Republicans were considering a significant reduction in the annual cap on pre-tax savings. The proposal would have slashed the annual limit by 87 percent, from the 2017 limit of $18,000 down to a mere $2,400.
Why would that make sense? Well, in the short term, it makes sense because pre-tax savings deprive the Federal government of significant tax revenues. If any employee saves $10,000 on a pre-tax basis, that’s $10,000 of income that is not currently subject to income taxation. In governmental budgeting terms, this results in a “tax expenditure”.
Yet in the long run, removing 87% of the potential incentive to save for retirement does not make sense. As you think about the ongoing struggle to increase your employees’ savings rates and the likely national retirement crisis ahead, that proposal is pretty scary.
Thankfully, it scared enough lobbyists and constituents that Republican leaders did not include any change to the annual savings limit in the House’s “Tax Cuts and Jobs Act”. President Trump forecasted that that would be the case when he tweeted that there would be “NO changes to your 401(k)”. For the time being – and obviously subject to additional Congressional negotiation – instead of worrying that the limit might drop to $2,400 next year, we can appreciate that it increases to $18,500.
We thought you might be interested in knowing that the Tax Cuts and Jobs Act does indeed include some less significant qualified retirement plan changes. For example:
- participants would not be required to exhaust plan loan options before receiving a hardship distribution;
- participants would not be required to cease elective deferrals for the six-month period following a hardship distribution;
- in the case of an unpaid loan at the time the participant terminates employment (or a plan is terminated), the grace period to pay off the loan and avoid immediate taxation would be extended from 60 days to the participant’s tax filing deadline (including extensions) for the tax year in which the loan offset would occur; and
- “closed” or “soft frozen” defined benefit plans could more easily satisfy the Tax Code’s nondiscrimination rules in the event the employer has provided a larger defined contribution plan benefit to participants who are excluded from the defined benefit plan.
Although everything in Washington remains quite fluid, there is reason for optimism that major tax reform will include only minor retirement plan reform. Of course, we’ll continue to monitor potential differences in a forthcoming Senate proposal, as well as potential compromises that could reshape the minor changes we’ve described above. Until then, let’s work together to focus on your participants utilizing the higher limits in 2018 — and hopefully beyond.
Matthew loves to write. He also loves to think, though he’s probably a better writer than a thinker. He does not like to be on camera or in videos. This blog will allow him to write, challenge his ability to think, and, from time to time, test him with video blog entries.
He has a unique blend of legal and practical experience that helps us to serve our clients well. On the one hand, he has more than 12 years of private legal practice experience focusing exclusively on employee benefits, including time as a partner in an employee benefits boutique where he has represented clients in front of the DOL and IRS. On the other hand, he holds his FINRA Series 7 and 66 registrations and serves as the Director of ERISA Services for Qualified Plan Advisors.
Matthew likes to stay active. He provides fiduciary training, Investment Policy Statement design, and vendor oversight to our clients. He is an active member of the Employee Benefits Committee of the American Bar Association Tax Section, serving as Chair of the Defined Contribution Plans Subcommittee. He also has been appointed to the IRS TE/GE Gulf States Council and is a frequent speaker on regulatory developments, fiduciary responsibilities, and retirement readiness.
Most importantly, he stays active with his family. His wife, Laura, is the founder of REbeL, Inc., a not-for-profit organization. His three young boys are mixed up in far too many sports, and they enjoy traveling, watching college football, running with Dad, and rooting for the Huskers.
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