Graff Warns of the Potential Impact of Tax Reform

American Retirement Association CEO Brian Graff reminded attendees at ASPPA’s 2017 Annual Conference at National Harbor, MD, this week that tax reform is a pressing matter. “We’re next,” he said, as he noted that several other tax proposals floated as potential revenue enhancers have been walked back.

“One person’s tax reform is another person’s tax increase,” Graff said. He noted that the Senate budget measure, which he said it is “likely the House will pass,” allows $1.5 trillion net in tax cuts. The question, he said, is what the tax provisions will be.

Graff outlined some of the possibilities. One of the options recently discussed, “Rothification,” he noted, is “not new at all.” Graff, joined by ARA’s General Counsel Craig Hoffman and Director of Retirement Policy Doug Fisher, noted that it harks back to former House Ways and Means Chairman Dave Camp’s 2014 proposals.

They addressed one of the most recent proposals: a $2,400 cap on the amount one could put into a retirement account on a pre-tax basis each year. “There’s a lot of people who are contributing more than $2,400,” noted Graff, adding that 60% of people would lose their up-front deductions. “We’re really not happy with this. We don’t think this is sensible policy.”

That belief is supported by data from the non-partisan Employee Benefit Research Institute. Using their Retirement Security Projection Model® (based on information from millions of administrative records from 401(k) recordkeepers), EBRI found that more than half of current 401(k) contributors would be affected by a $2,400 pre-tax contribution limit.

“The 401(k) is not a piggybank for corporate tax cuts,” said Graff, pledging that the ARA will work to make sure this doesn’t happen.

Pass-Through Rate 

Another tax reform proposal would create a new 25% tax rate for businesses organized as pass-through entities. That rate would apply only to the business income portion of the entity’s total income, with the compensation portion taxed at ordinary income rates. This, they said, could result in fewer businesses even offering a retirement plan in the first place. “We believe this is an unintended consequence” of the proposal, Hoffman said.

Fisher added that “the $64,000 question” is how the entity’s total income is allocated, and that if it is enacted as part of a tax reform measure, service providers may ask themselves, “Do my clients in these pass-through entities need to go through the hassle of a retirement plan?” Hoffman agreed, telling attendees, “We believe it will be very easy for financial advisors to say, ‘Don’t put money in a plan’” if such a provision becomes law.

“They are actually doing this stuff,” warned Graff, adding, “this is not a drill.” And there is added risk, he noted, given all the current distractions. “We are worried this won’t rise to the level that it needs to,” said Graff.

RESA Redux?

Another possibility, they noted, is that the Retirement Enhancement and Savings Act of 2016 (RESA), which had been marked up by the Senate Finance Committee in September 2016 but never reached the floor of the full Senate for a vote and therefore was never enacted, may be reintroduced in this session of Congress. In fact, Hoffman called its reintroduction “imminent.”

Among the proposals contained in RESA was a provision calling for pooled employer plans (PEPs), which would allow for open multiple employer plans (MEPs) with no commonality if certain requirements are met. And Graff expressed the view that this idea may have staying power. “This MEP/PEP thing isn’t going away,” said Graff.

Yet another issue that they said is “still percolating” is lifetime income disclosure, based on the Lifetime Income Disclosure Act, which would require ERISA defined contribution plans to include annuity equivalent calculations on benefit statements once a year.

Fiduciary Rules 

Tax reform is not the only game in town, the panel noted. “We expect the DOL will revisit the BIC provision” of its fiduciary duty rule, said Graff. “This is an ongoing saga,” he said, adding, “it’s not going away.”

And the federal level is not the only one on which fiduciary rules are being put in place. For instance, Nevada quickly put a fiduciary standard in place. And it may not be the last — Graff noted that other states are considering similar steps, and that other states tend to copycat such measures. “That’s why we’re working so hard on this,” he said.

Add Your Comments

One Comment

  1. Posted October 30, 2017 at 11:22 am | Permalink

    A comprehensive and objective analysis of tax reform needs to take into account, not just the immediate tax impact, but also the anticipated impact on corporate and employee earnings and economic growth. That is the purpose of the whole exercise. By themselves, lower tax rates reduce the value of the tax deduction, a disincentive for retirement plan formation. Not to argue for the particular 401(k) tax changes, but isn’t there some benefit to salary increases and a secure job?

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