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Amendments to Senate Tax Reform Could Help, Hurt Retirement Savings

A weekend of lobbying on Capitol Hill has yielded some encouraging news on tax reform – but serious problems remain for retirement plans.

Sen. Rob Portman (R-OH) has filed an amendment to strike the provision prohibiting catch-up contributions for business owners making more than $500,000, as well as the provision – contained in the House version but then dropped before being voted out of the Ways & Means Committee, only to reemerge in the Chairman’s Mark in the Senate – that would have essentially eliminated almost all forms of deferred compensation. That’s only a proposed amendment at this point, of course – albeit one that the Government Affairs team will be working to help make sure is adopted.

Under the proposal unveiled Nov. 9 by Sen. Orrin Hatch (R-UT), Chairman of the Senate Finance Committee, as of plan years and taxable years beginning after Dec. 31, 2017, individuals could not make any catch-up contributions – even on an after-tax basis – for a year if they received wages of $500,000 or more in the preceding year. The provision is estimated to raise only about $500 million over 10 years.

The Chairman’s Mark also contained some bad news for 403(b) and 457(b) plans, eliminating the special catch-up rules for 403(b) and governmental 457 plans and coordinating limits between 403(b) and 401(k) plans and governmental 457 plans, and applying the 10% early withdrawal tax to governmental 457 plans (which cover workers such as police and firemen, who often retire before the age 59½ threshold that the proposal would impose).

Other Amendments

Sen. Ben Cardin (D-MD) has proposed changes to the Saver’s Credit ($1,000 on the first $2,000 of savings, with refundability), along with an increased income threshold for joint filers (to $65,000, with a $20,000 phaseout). Along with cosponsors Sherrod Brown (D-OH), Bob Casey (D-PA), Debbie Stabenow (D-MI) and Ron Wyden (D-OR), the amendment would require that the credit be contributed directly to a qualified retirement account. The proposed amendment also directs the Treasury Department to reinstate thew myRA program. In July, the Treasury Department announced that it would be winding down the myRA program due to low demand and high expenses.

Additionally, Senate Finance Committee Chairman Orrin Hatch (R-UT) has reportedly filed an amendment to his own proposal that would mandate Roth tax treatment for all catch-up contributions, but would also increase the catch-up limit to $9,000. It is not clear at this point whether Chairman Hatch would actually take up this amendment – but it’s one that we will certainly be keeping an eye on. Stay tuned.