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2017 Proposed Tax Reform

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What changes can 401(k) Plan Sponsors expect if tax reform passes?

December 1, 2017

There are currently two proposed tax bills under legislative review.  One from the House of Representatives and the other from the Senate.  Although the primary focus is on personal and business income tax revisions, there are several items that pertain to Qualified Retirement Plans as well.  

House Bill

Overall the changes proposed by the House are beneficial to plan participants  and sponsors alike as they eliminate restrictions that increase flexibility for participants and reduce administrative burden for business owners.  Proposed changes include:

  • Removal of the 6-month 401(k) deferral contribution suspension after an employee receives a hardship withdrawal from pre-tax or Roth deferral sources.
  • Expanding the available hardship contribution sources to include Safe Harbor Contributions, QNECs, and QMACs, as well as earnings on employee deferral sources.
  • Adding rollover flexibility for Employees who terminate with an outstanding participant loan balance.  They will have until the due date of their individual tax return to facilitate a rollover and thus may defer taxation of the deemed distribution.
  • Defined Benefit and Money Purchase plans can choose to allow in-service distributions as early as age 59½ (previously Age 62).
  • Eliminates the requirement that participants first take all available loans from the plan before becoming eligible to request a hardship distribution.

Senate Bill

Since the House bill was released first, the Senate bill is subject to ongoing revisions to bring the two proposals into closer alignment. There is one key item of note though that is unique to the Senate:

  • Revision to increase the Catch-Up contribution limit from $6,000 to $9,000 but with the requirement that Catch-Up contributions be made only on a Roth (After-Tax) basis.

From a benefit perspective, this one does not substantially improve plans in any way for either Participants or Plan Sponsors.  The increase in limit may not offset the loss of flexibility that the Roth requirement imposes.  This is a definite “win” for the government in that it mandates payment of taxes up front rather than allowing deferment until retirement.  For participants, it could be a Pro or a Con.

Other

In separate bill the House has also proposed a change to the Cash Out distribution limit increasing it from $5,000 to $7,500 and also adding an inflation component for automatic adjustments in the future.

Summary

 

As aggressively as both congressional branches are working on their respective bills, we are anticipating that they one or both will be passed this year putting changes into effect for 2018. 

In addition, based on the fact that the Retirement Plan related provisions are a very small component of the overall tax reform package, we feel it is unlikely that there will be much in the way of major modifications to the above noted provision that relate to qualified plans.