Retirement Plan Tax Changes: Was I Psychic?
In a recent blog entry on tax reform, I proposed some changes to retirement plan law that could help raise revenue. Now, when I wrote those suggestions, I was fairly confident that neither the House nor the Senate proposal would incorporate any of them.
However, either by coincidence, psychic powers, or (less likely) a Senator or staff member reading our blog, some of my suggestions were actually included in the Senate’s markup of the House’s tax reform bill; although, in one case, not in the way that I intended!
To recap my suggestions, as well as their current legislative status:
- Get rid of the dreaded 15-year catch-up election for 403(b) plans, which permits additional elective deferrals to 403(b) plans for certain employees — The Senate specifically incorporated the elimination of this provision (simply stunning to me!), and should be welcomed by anyone who has actually experienced the burden of calculating and/or attempted to communicate this election to an employee. Unfortunately, the Senate markup also eliminated the 5-year post-retirement contribution election for retirement plans. However, in my experience, this election is not commonly used, so perhaps it will not be missed, should this proposal become law.
- Abolish the Saver’s credit, which provides a tax deduction for those with modest incomes on their retirement plan/IRA savings — I was hopeful when I read the Senate’s modification to the markup and saw that it mentioned the Saver’s credit. Unfortunately, it was only in the context of allowing ABLE contributions (contributions to a tax-qualified program for disabled individuals) to be eligible for the credit. Oh well! I realized my suggestion on this particular item would be unlikely, since it could be politically difficult to remove a tax credit that primarily benefits low-income individuals. However, as previously noted, the non-refundability of the credit renders it of little practical benefit to modest income earners. So if any Senators are reading this, there is still time to reconsider!
- Reduce the bordering-on-ridiculous amount that employees of some tax-exempts/governmental entities can defer — Unfortunately, the Senate took my suggestion a bit too far. Instead of lowering the combined limit on deferrals to 403(b) and 457(b) plans, which is as much as $49,000 for some individuals, the Senate decided the eliminate the additional 457(b) deferral opportunity entirely. This means that the combined 403(b)/457(b) deferral limit would only be $18,500 in 2018! I previously suggested a drop to $25,000, but never in my wildest imagination did I think that the Senate would reduce the combined limit at all, much less to a level that would essentially eliminate the use of 457(b) plans for plan sponsors that also offer a 403(b) plan!
Hopefully, they will reconsider such a drastic change. As an aside, technically, as written, this limit only applies to combinations of 403(b) and 457(b) governmental plans. However, I imagine that this is merely an oversight, since private tax-exempt 457(b)s are not at all mentioned in the markup, even in the explanation of current law (it is almost as if the Senate was not aware of their existence!). I suspect that this oversight will be corrected, or else the political optics of this change would be quite poor, since private tax-exempt 457(b) plans typically benefit “select management and highly compensated employees” (with the exception of faith-based colleges/universities and religious hospitals that are not qualified church-controlled organizations), whereas the affected plans typically serve public K-12 schoolteachers.
So, as written, teachers’ elective deferral limits would be reduced; however, those of university presidents, college coaches, and healthcare CEOs, among others, would not. Now, this may have been intentional, but given the nature of tax reform in general (i.e., other measures that specifically target high earners), I tend to doubt it. However, if the omission was indeed intentional (and there is certainly a possibility that this is the case), it will at least mean that 457(b) plans can continue at private tax-exempts.
In conclusion, it is important to note that we are a long way away from the final tax reform law; therefore, all of this is subject to change - perhaps numerous times. So stay tuned to Cammack Retirement for all the latest news on how the tax reform proposals may affect your retirement plan!
Editor’s Note: This blog entry was written on November 15th, so any amendments to the proposals since that date may not be reflected. Please visit Twitter for continuous tax reform coverage.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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