Retirement Plans Not Out of the Woods Yet on Tax Reform

Congress is still considering the idea of making defined contribution (DC) deferrals after-tax (Roth) instead of pre-tax.

While President Donald Trump’s tax plans don’t seem to include proposals affecting retirement accounts, we are not out of the woods yet, according to Will Hansen, senior vice president of retirement and compensation policy at the ERISA Industry Committee (ERIC), based in Washington, D.C.

Congress has proposals on the table that directly impact the tax treatment of retirement plans, including proposals to make defined contribution (DC) deferrals after-tax (Roth) instead of pre-tax. “This is something they are reviewing and potentially including in their first iteration of a tax-reform plan,” Hansen says.

Hansen has heard in meetings with Congressional staff that, along with the Roth proposal, Congress has proposed to provide what Hansen calls “sweeteners”—an increase in deferral limits, changing the saver’s credit, using e-disclosures and encouraging employers to provide student loan repayment programs.

He’s also heard there are discussions around making all deferrals Roth deferrals, or just 25%, or making them 50% pre-tax and 50% after-tax. “The purpose behind that is to raise revenue to pay for other non-retirement related items in the tax code,” Hansen says. “Retirement is often a target if Congress needs money.”

Hansen says it will be interesting to see DC plan participants’ reaction to a reduction in pre-tax contributions. “Employers will need to review whether they see a drastic drop in participation and contributions. If Congress moves deferrals to 100% Roth, I think that drop would be huge and a detriment to the retirement savings of Americans,” he states. He adds that moving to Roth deferrals takes away flexibility from employees and is a massive shift in the way they save for retirement.

If this happens, how will employers be able to continue to provide competitive benefit packages? Hansen notes that in health care debates, there are proposals to expand deferrals into health savings accounts (HSAs), and penalties for non-medical spending of these accounts go away when a participant turns age 65. “So will HSAs replace 401(k)s as a retirement savings vehicle?” he queries.

Retirement plans are also not out of woods yet because the Trump administration can put forward any sort of proposal they want without having to face the reality that Congress wants tax reform to be revenue-neutral, Hansen notes. “We need to fight to protect pre-tax deferral limits on DC plans,” he says.

In a statement, Annette Guarisco Fildes, president and CEO of ERIC, said, “While ERIC appreciates the Administration supporting the preservation of the pre-tax treatment of contributions to retirement plans, we are concerned with Congressional proposals that call for dramatic changes to the retirement system in America, such as replacing pre-tax contributions with after-tax Roth contributions. A drastic shift to Roth contributions could undermine the entire retirement system in this country and undo the progress that has been made through widely favored pre-tax [DC] plans.”