The House finally released a draft of their tax reform plan, and for right now, it looks like they will be leaving 401(k) contributions alone. Back in April, I wrote about how the Trump administration was looking at changing the deductibility of 401(k) deferrals as a way to fund their projected reduction in tax revenue. The administration was thinking about changing 401(k) contributions from being tax-deferred to being after-tax Roth style contributions. Their five-year projection indicated this would save up to 583 billion dollars over the next 5 years.
While there was much discussion about this actually coming to fruition, the first draft of the tax reform plan leaves 401(k) plans alone. Despite this, I don’t believe this matter is now behind us. As a refresher, let’s take a moment to walk through the legislative process that moves a bill from draft through to being signed into law so you can see all the opportunities where it can now be changed.
1. The tax bill originates in the House of Representatives in the Ways and Means committee. When they reach an agreement, a proposed tax law is written.
That is where we are now.
2. It then goes to the full House for debate, various amendments and then approval.
A lot can change during this phase of the bill until it is finally approved by the House.
3. The bill then moves over to the Senate for their own round of debate and amendments before approval.
4. The bill goes to a joint committee of House and Senate members who work on a compromise bill.
The committee then sends the compromised version is then sent to the House and Senate for approval.
5. Now all that is left is for the President to sign it into law.
However, if the bill has changed so much that the president does not like it, he has the right to veto it. If he does veto it, then only if the House and Senate override the veto with 2/3 vote in each will it become law.
As you can see, there is still a long way to go before we are out of the woods. When I used to make my living as a tax accountant, I never spent a lot of time reading up on proposed tax law changes until it got closer to the compromise version. Too much can change during this process.
Here’s my point. Not too many years ago, employers were much more paternalistic about their employees’ retirement. Many employers sponsored defined benefit plans that were funded with employer contributions based on actuarial calculations tied to an employee’s age and compensation. Many employers also funded defined contribution plans where they made contributions based on a profit-sharing formula or other measures that helped to further supplement benefits provided by the defined benefit plans. Employees could also make after-tax contributions to these plans under code section 401M that helped further ensure an adequate retirement (I will spare you this discussion on why this changed for another day).
It is now mainly up for the employee to make sure they save enough for their retirement. To be fair, many employers offer matching contributions when employees make the effort to save for their retirement by making voluntary tax-deferred contributions to their retirement plan, but the basic tenet of today’s retirement plans is that they are employee funded.
The government hasn’t exactly done a stellar job in managing the money we and our employers have contributed to the social security administration. It has big issues that will have to be addressed in the near future. So take a national retirement system based on an unsound social security administration and employee funded voluntary retirement plans, and that now composes the retirement model for most Americans. And our elected representatives in Washington are considering changing the rules around those employee contributions to help fund their proposed tax cuts.
This is just wrong. We need a retirement system that we can trust, that will not be changing as new administrations come into office, or when politicians see our tax-deferred retirement contributions as a source of funding for current and future deficits. We must demand from our elected officials that tinkering around with the tax laws where it affects our retirement system is strictly off limits.
L. Burton Keller was a principal founder of the company in 1985 and currently focuses on strategic initiatives for the company. Mr. Keller is a former member of the Bank, Trust and Retirement Advisory Committee of the Investment Company Institute. He has served on numerous committees and task force groups with the ICI over the last 17 years including Co-chair of the Dividend Distribution Task Force.