401(k)s untouched in latest House, Senate tax proposals; NQDCs in jeopardy
Retirement plan sponsors can breathe a sigh of relief as the Senate’s tax plan leaves 401(k)s untouched, although it is still considering cutting 401(k) catch-up funding for higher earners.
The Senate also included a proposal that was initially included in the House tax reform bill that would immediately tax money set aside in non-qualified deferred compensation plans, which are used by employers to help fund the retirement of their highest earners.
The U.S. Senate Committee on Finance released its stab at a tax reform bill on Thursday afternoon. Meanwhile, the House Ways and Means Committee voted to advance its own tax reform bill, with amendments, to the full House of Representatives. The House leaves untouched 401(k)s and NQDCs. And the House and Senate proposals, at this point, do not include a repeal of the Affordable Care Act, according to reports.
For plan sponsors, one of their biggest questions this week was whether 401(k) plans would be touched. There had been talk about both the House and Senate proposals lowering the amount of money workers could set aside in a pre-tax retirement plan and funneling the rest into after tax Roth 401(k) or Roth IRA options as a means of boosting revenue to pay for other Republican tax cuts, but that proposal never made it into either bill.
“We are very pleased to see that the Senate Finance Committee's tax bill proposal preserves the tax-qualified status and limits for 401(k), 403(b), and other retirement savings plans,” says retirement adviser Alex Assaley, managing principal of AFS 401(k) Retirement Services. “This is a big positive for the private retirement system and, most important, working Americans. We know workers greatly value these benefits and are exponentially more likely to save for their future when they have a 401(k).”
The Save Our Savings Coalition said in a statement that the House bill approved today “is good news for millions of middle-class families across the nation. American workers and their families deserve the opportunity to retire with financial security and independence and, for decades now, our retirement system has helped families do just that. We remain extremely pleased that the House legislation continues to protect retirement savings, allowing millions of middle-class families to continue to have the freedom to choose the savings vehicle that best suits their needs.”
The organization pointed out that savings are an important driver of economic growth.
“At the end of 2016, U.S. retirement assets totaled $26.6 trillion invested in the equity and fixed income markets, making American capital markets the largest and most liquid in the world. Those dollars power the economy by giving businesses the necessary funds to create more goods and services,” the coalition added.
Meanwhile, the Senate tax proposal released Thursday would restrict employees earning at least $500,000 from making so-called "catch-up" contributions to 401(k) workplace retirement plans.
Almost all employers offering 401(k) plans allow eligible workers age 50 and over to make the additional contribution, which is $6,000 for 2017, on top of the standard $18,000 cap. Thirty-five percent of workers with salaries of $100,000 or above took advantage of the option in 2016, according to a survey of large employers by benefits administrator Alight Solutions.
The appeal of the contributions to high-income workers is less the tax deduction and more the deferral of that money into a Roth 401(k), where earnings on the money, which is contributed on an after-tax basis, can compound and be withdrawn in retirement without having to pay tax, said Greg Rosica, a tax partner at Ernst & Young.
"Catch-up contributions are a valuable tool that allows older workers to add to savings for retirement," said Robyn Credico, senior retirement consultant at Willis Towers Watson.
The Senate bill differs from the House bill that was passed by the House Ways and Means Committee in that it would tax money set aside in non-qualified deferred compensation plans immediately. These plans are used by companies to help higher earners to set additional funds aside for retirement. Currently, a worker can set aside a large percentage of their salary into a non-qualified deferred compensation plan that would pay out in five years, 10 years or at retirement. Employees don’t pay taxes on that money that is set aside in a NQDC in the year they receive it. Instead, the money “has the potential to grow tax deferred until you receive it,” according to information about NQDCs from Fidelity.
The amended House tax reform bill, released today, eliminates the section that would have accelerated taxation of money put away into non-qualified deferred compensation plans. The earlier version would have taxed deferrals as soon as they weren’t at risk of being forfeiture instead of when they eventually paid out.
Industry experts believe the provision, if left in the final tax reform bill, could force many U.S. companies to stop offering these types of programs.
Bloomberg News contributed to this report.