Is Rothification Off the Table?

Rothification may not be on the table – yet – but the GOP’s tax reform outline includes a potentially nasty surprise for small business retirement plans.

Those taking a public stand against the so-called “Rothification” of 401(k)s yesterday included Rep. Richie Neal (D-MA) and Sen. Tim Scott (R-SC). But even those who commented that the nine-page “Unified Framework for Fixing Our Broken Tax Code” didn’t reference a change in tax treatment for America’s primary retirement saving vehicle acknowledged that a commitment to retain “tax benefits that encourage work, higher education and retirement security” alongside a statement that “Tax reform will aim to maintain or raise retirement plan participation of workers and the resources available for retirement” didn’t necessarily preclude a consideration of change at some point.

At a luncheon briefing on Capitol Hill Wednesday, Sen. Scott, while noting that the so-called “Big 6” recognized the importance of keeping retirement savings incentives “as is,” cautioned that Rothification in some form or fashion could be tapped at the last minute as a “pay for.”

However, the tax reform outline does include a proposal to cap the tax rate on small business “pass-through” income at 25% — an apparent technical glitch under which the owners of pass-through entities, including partnerships, S corps and small business LLCs, would be financially penalized for saving in a retirement plan. (For more on this proposal, read American Retirement Association General Counsel Craig Hoffman’s commentary here.) This is a potentially huge issue for your small business clients, and for the nation’s retirement plan coverage generally.

We’ve been talking – and warning – about the prospects for, and potential implications of, tax reform for more than a year now.

Here we go. Stay tuned.

Add Your Comments

One Comment

  1. Lawrence Zeller
    Posted September 28, 2017 at 12:09 pm | Permalink

    We have learned that Congress likely cannot pass legislation unless the Ds & Rs work together. Both parties seem interested in tax reform, so that may happen eventually. However, the final bill is most assuredly going to be radically different than what’s been outlined by the GOP so far. We’re appreciative of the hard work of many at ASPPA to express important concerns over provisions that could hurt the private pension system during this process.

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