Earlier this year, Scott Cameron outlined some of the options around tax reform as it relates to retirement plans, but now the time has come for the parties to put pen to paper. On September 27, the Trump Administration released the outline of its proposed tax reform plan and shortly thereafter the House Ways and Means Committee, led by Republican Kevin Brady, began work on the Tax Cuts and Jobs Act, which was released on Thursday, November 2. Now, it’s time for the House Ways and Means Committee to begin their markup of the proposed legislation this week.
So far, how does your company’s retirement plan fare under the proposed tax scheme? Overall, retirement plans survived, but the battle isn’t over and the devil is often in the details. Much of the gossip around Washington leading up to the proposed Tax Cuts and Jobs Act led many to believe that there might be a cap of $2,400 on pre-tax contributions to retirement plans. That provision was not included in the proposed legislation.
What’s included? The proposed legislation does include several provisions that would impact retirement plans, including:
- Nonqualified Deferred Compensation. For those with nonqualified plans, there could be substantial impacts. Section 3801 of the legislation provides that an employee would be taxed on compensation as soon as there is no substantial risk of forfeiture, which means that employees could no longer defer compensation on a tax-deferred basis to a 401(k) excess plan, since they are typically vested in the deferrals.[1] For more information on this provision, consult with a qualified tax attorney or tax professional.
- Loans and Hardship Distributions. For those plans that allow loans, the proposed bill would lengthen the time that employees who have left the firm/company have to pay back a loan. The current rules allow for 60 days to pay back the loan whereas the proposed legislation would allow up until the individual files his/her tax return for that year. Additionally, if the plan allows for hardships, the proposed legislation changes the rules such that a participant can continue to make contributions to the retirement plan while taking a hardship; the current rules require a six-month suspension of contributions upon hardship distribution. Second, if permitted by the plan, hardships would now be allowed from employer money as well as account earnings (rather than distribution solely from employee funds).
- In-service Distributions. For those defined benefit plans and governmental plans, distributions are not allowed until age 62. Under the proposed rules, in-service distributions would now be allowed at age 59 ½, if permitted by the plan.
The above items outline proposed legislation, which have not been passed and, hence, no action is required by plan sponsors at this time. For now, stay tuned as the process is just getting started. The proposed legislation discussed in this post comes from the House and there is much opportunity for markup of the House bill (taking place this week) as well as the chance for the Senate to propose their own version. For more information about how tax reform may impact your retirement plan(s), contact your Multnomah Group consultant.
Note:
[1] See, Nevin Adams, Could Tax Reform Destroy Deferred Compensation? available at: http://www.napa-net.org/news/technical-competence/legislation/could-tax-reform-destroy-deferred-compensation/?mqsc=E3918490&utm_source=WhatCountsEmail&utm_medium=NAPA_Net_ListNapa-Net%20Daily&utm_campaign=2017-11-06_eNewsNAPA_Mon.
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