Retirement plan sponsors will be happy to note that many of the proposed changes to defined contribution plans that were discussed early on as part of the tax reform debate were excluded from the final bill, but the bill does include a handful of items that could affect retirement plan sponsors.

Most notably, the final tax reform bill, which merges both the House and Senate versions, includes a provision that could impact whether or not small businesses host retirement plans.

The bill increases the deduction for qualified business income of pass-through entities to 20%. That means that pass-through businesses, like S Corporations, would pay a lower tax rate by excluding as much as 20% of their business income from taxation. Retirement plan contributions are generally deducted against the S Corporation’s business income, which under this provision, would be much lower than the income tax rate S Corporation owners pay on retirement savings when they retire.

“S Corporation shareholders may be better off financially if they forego a retirement plan contribution and instead pay tax on their savings and invest the proceeds outside the plan,” Doug Fisher, director of retirement policy at the American Retirement Association, writes in an analysis on NAPA-net.org. “The attractiveness of a retirement plan is further diminished when a business owner factors in the cost of contributions to meet plan testing rules, plan administration costs and the ERISA fiduciary risks associated with operating and administering a qualified plan.”

Senate Majority Leader Mitch McConnell, a Republican from Kentucky, center, walks to a private GOP meeting at the U.S. Capitol in Washington,  on  June 22.
Senate Majority Leader Mitch McConnell, a Republican from Kentucky, center, walks to a private GOP meeting at the U.S. Capitol in Washington, on June 22. Andrew Harrer/Bloomberg

The final bill also includes a provision that would allow those who leave their current employer with an outstanding loan from their workplace retirement plan to not be taxed on the loan amount if they contribute the loan balance to an IRA by the date their individual tax return is due. Currently, individuals only have 60 days to make that rollover before they are taxed on the loan amount.

“Coming up with the funds to repay an offset plan loan within 60 days (as is now required) can be very challenging,” says David Musto, president of Ascensus, an independent provider of retirement, health and college savings plans.

Also see: "ACA mandate undone in GOP tax accord, threatening law."

The bill will also relax hardship distribution rules for employer-sponsored retirement plans. This means that plan participants could withdraw money at any time from their retirement accounts if they have an emergency. That could be considered a positive and a negative at the same time, says Musto.

“It could be good for the person who is in dire straits and needs access to their retirement savings. However, it could also be a long-term negative in that it could contribute to dwindling of retirement assets for savers,” he adds.

The final tax bill would authorize the use of 529 plan savings, up to $10,000 a year, for elementary and secondary school expenses. Currently, 529 plan money can only be used for qualified college expenses.

What isn’t in the bill
The retirement savings industry was afraid that the House and Senate would pay for various tax cuts by putting a cap on how much employees could save in their workplace retirement plans on a pre-tax basis. The initial discussion centered around a cap of $2,400 pre-tax, a major reduction from the current cap of $18,000. Any additional contributions would have to be made into an after-tax Roth 401(k). Those provisions were eliminated from the discussion before the final House bill was released in November and were never included in the final Senate version.

The initial House bill included a provision that would have immediately taxed compensation set aside in non-qualified deferred compensation plans. It also discussed a proposal that any catchup contributions made after age 50 be funneled into a Roth plan instead of the employer’s traditional 401(k) plan. Neither the House or Senate bills included these provisions.

The Senate bill initially proposed a provision that would have harmonized the contribution limits that apply to 401(k), 403(b) and government 457(b) plans effective in 2018, meaning that they all would have a contribution limit of $18,500 in 2018, plus a $6,000 catch-up contribution for people 50 and older. The provision was dropped before the final bill went to the floor for a vote.

In the end, much of what was proposed that would impact small business retirement plans was cut from the final bill as part of the conference agreement between both houses of Congress.

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