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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.

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