While most people in the retirement plan industry have focused largely on the DOL’s Conflict of Interest Rule and its impact on advisors, recordkeepers, plan sponsors and plan participants, lurking in the background has been the potential advent of comprehensive tax reform — which puts retirement deferrals in the crosshairs. Retirement deferrals are one of the largest tax expenditures and are always on the chopping block when Washington needs to pay for initiatives. The last time we had major tax reform in 1986, retirement deferrals were slashed by 70 percent.
When the Republicans gained both the White House and Congress in November, it was clear that major tax reform would happen in 2017, and the goal was to make the changes revenue neutral. It was predicted that ACA repeal would provide a $1 trillion “gain” and the Border Adjustment Tax (BAT) would provide an additional $1 trillion toward a $5 trillion revenue-neutral goal. However, the near-term political failure to repeal ACA eliminates that option (for now), and just yesterday, it was reported that the Trump administration is putting that proposal to the side as it releases its new tax plan (although they could revisit it in the future). This $2 trillion potential “loss” puts extreme pressure on retirement.
More broadly, the near-term failure of ACA and a fractured Republican party could affect both the drive and the timetable to accomplish comprehensive tax reform. In fact, it now appears that the forthcoming tax reform will be more centered on corporate tax reform.
What’s New for Workplace Retirement?
Even so, it’s important to understand the ways that American workers’ ability to save in a workplace retirement plan could be affected by tax reform. Late last year, the Senate Finance Committee passed S.3471, Retirement and Enhancement Savings Act of 2016. It is still “on the shelf” ready to be dusted off – there was previously no ride to hitch – and there are provisions that could be included in new tax reform, including the “star” of the bill: open Multiple Employer Plans (MEPs), or pooled employer plans, as well as lifetime income features in retirement programs.
Additionally, there’s much talk that we’ll see a “Roth-ification” of 401(k) plans, whereby mostly after-tax deferrals will be allowed – not pre-tax – and that change would generate roughly $1.5 trillion over the next decade. While that might benefit Washington in its next 10-year budget window, the question is whether it would benefit participants. If we also see lower individual tax rates as part of tax reform, it could benefit workers to use after-tax dollars today. However, in our instant gratification society, will folks see the future benefit and choose to save now?
Key leaders in the House of Representatives, including Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady, are advocates of tax “simplification.” Simplification can take many forms, including the elimination of features and structures common in many types of existing retirement savings vehicles. What those will be remains to be seen.
Trump Administration Unveils New Proposed Tax Breaks
To confuse matters, at the April 26 unveiling of the Trump Adminstration’s tax plan, White House National Economic Council Director Gary Cohn said in his prepared remarks that they would preserve tax breaks that incentivize home ownership, retirement savings and charitable giving — but almost all other tax breaks would be jettisoned.
However, in the Q&A with reporters, Secretary Mnuchin, who presented the plan alongside Mr. Cohn, said that only mortgage and charitable deductions would be included. Did he forget about retirement? Does he actually understand the distinction between deductions and deferrals (many do not)? Or are retirement deferrals really not spared? To add to the confusion surrounding the briefing, the briefing handout provided to all reporters only listed charitable and home mortgage deductions as those that would be preserved.
We may not know for some time, as there’s still much political wrangling on the horizon, but we’ll definitely be paying close attention. Because, according to Bradford Campbell – former Assistant Secretary of Labor under President George W. Bush and current partner in law firm Drinker Biddle & Reath LLP – when it comes to tax reform, “Unfortunately, when lost revenue has to be replaced, it’s a game of winners and losers, and the retirement system is poised to be one of the losers.”
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