The Tax Cuts and Jobs Act passed by the US House of Representatives Ways and Means Committee on November 2, and a Description of the Chairman’s Mark of the Tax Cuts & Jobs Act released by the Senate Committee on Finance on November 9, would make sweeping changes to the tax treatment of executive compensation, fringe benefits, and tax-qualified plans (among many other areas) in order to pay for the bills’ centerpiece reductions to corporate and individual tax rates. This blog highlights changes that would affect tax-qualified savings and pension plans. In anticipation of changes in this area effective for tax years beginning after 2017, we recommend staying abreast of the tax proposals that could impact your business, and preparing for key management to be available to modify documents at the end of December.
The big news in the bills is that they do NOT (as widely speculated before their release) reduce the limit on pretax contributions to 401(k) plans, which is $18,500 for 2018. However, the House bill contains a number of smaller proposed changes that are intended to simplify plan administration, promote savings, and/or raise revenue, and the Senate bill proposes several targeted reductions to various tax-qualified retirement plan contribution limits. The House bill
- reduces the minimum age for in-service distributions in defined benefit plans and state and local government defined contribution plans to age 59½, aligning this provision with the rule for 401(k) plans;
- eliminates the requirement that employees suspend contributions to a 401(k) plan for the six-month period following a hardship distribution;
- expands the sources of 401(k) accounts available for hardship withdrawals to include not only elective deferrals but also earnings on elective deferrals, as well as certain types of employer contributions (e.g., qualified non-elective contributions and qualified matching contributions) and earnings on those employer contributions;
- extends the period for an employee to roll over an outstanding loan balance to an IRA following a termination of employment to avoid the loan being treated as a distribution from 60 days to the due date for filing the employee's tax return for the year; and
- provides nondiscrimination testing relief to certain employers sponsoring closed defined benefit plans by expanding the availability of cross-testing between an employer's defined benefit and defined contribution plans.
While the Senate Committee on Finance promotes its bill as “Continu[ing] popular retirement savings programs such as 401(k)s and Individual Retirement Accounts, to help Americans build their retirement nest eggs and prepare for the future,” it does not include or address any of the proposed changes in the House bill’s relaxed rules for hardship withdrawals, loan balance rollovers, or nondiscrimination testing relief listed above. Rather, the Senate concentrates more on standardizing certain rules across all types of retirement plans, making targeted reductions in contribution limits and raising revenue. The Senate bill
- extends the existing 10% early withdrawal tax that currently applies to distributions before age 59½ from qualified retirement plans, 403(b) plans and IRAs (including SEPs or SIMPLE IRAs) to government 457(b) plans;
- eliminates age 50 “catch-up” contributions to qualified defined contribution plans, section 403(b) plans, governmental section 457(b) plans, simplified employee pension “SEP” plans and SIMPLE IRAs that are allowed under current law ($6,500 for 2018) for high-wage employees who receive wages of $500,000 or more in the preceding year; and
- conforms contribution limits across all types of tax-qualified plans by: (1) applying a single aggregate limit ($18,500 for 2018) to elective deferral contributions to 457(b) plans and 401(k) or 403(b) plans of the same employer; (2) eliminating the special rules permitting employees to make additional elective deferral and catch-up contributions under section 403(b) and governmental 457(b) plan sponsored by the same employer; (3) repealing the special rule allowing employer contributions to 403(b) plans for up to five years after termination of employment; and (4) setting a single aggregate limit on contributions to all types of tax-qualified defined contribution plans (401(k), 403(b) and 457(b) plans) maintained by the same employer, at the lesser of $55,000 (for 2018) and the employee’s compensation.
The House bill already has been amended in multiple ways, and several amendments have been proposed in the Senate. We can expect more changes in the weeks ahead as Congress develops a final proposal that satisfies the key limitations imposed by the budget reconciliation process: In order to pass through a simple majority vote in the Senate, the legislation cannot increase the budget deficit by more than $1.5 trillion over a 10-year period and cannot increase the budget deficit by any amount after that period. Both proposals currently exceed the $1.5 trillion figure, and significant “sunset” provisions may be required to satisfy the latter requirement. Since most of the proposed benefits-related changes raise revenue, they may be difficult to remove given these constraints. We will keep you apprised of significant amendments to proposals affecting qualified plans.