House GOP unveils sweeping tax reform bill with retirement provisions

House Republicans on November 2, 2017 unveiled their much-anticipated tax reform legislation, the Tax Cuts and Jobs Act (HR 1). The 429-page bill, which represents the House Ways and Means Committee’s first legislative offer to significantly overhaul the U.S. Tax Code, includes a number of pension-related provisions but does not include, at least initially, the widely-discussed provision to reduce the 401(k) pre-tax contribution limit.
House Republicans have not yet reached consensus on the proposals within the bill, and GOP House leaders can only afford to lose 22 votes on the measure if the bill receives no Democratic support.
Across the U.S. Capitol, the Senate Finance Committee is reportedly still planning to unveil its own tax reform bill soon.

Pension provisions in HR 1

Although the bill leaves the current 401(k) contribution limit untouched, other provisions included in the measure would significantly impact the rules governing the treatment of retirement plan hardship withdrawals and in-service distributions, among other rules.
For instance, the bill would reduce the minimum age for allowable in-service distributions under Code Sec. 401(a), which currently stands at age 62, down to age 59 and a half. For 457 plans, the in-service distribution age would be reduced from age 70 and a half, under current Code Sec. 457(d)(1)(A), down to age 59 and a half under the House bill. According to a summary of the House bill, this provision would encourage Americans to continue working full or part-time instead of retiring early in order to access retirement savings at age 59 and a half. Further, this provision would provide uniformity across various plan types, allowing all plans to offer in-service distributions at age 59 and a half, instead of having different in-service distribution ages for different types of plans.

A new Code Sec. 401(o) would provide for the modification of the nondiscrimination rules to protect older, longer service participants. Where an employer sponsors both a defined benefit plan and a defined contribution plan, limited cross-testing currently is allowed between the plans. The measure would clarify that a defined benefit plan that provides benefits, rights, or features to a closed class of participants would not fail to satisfy the Code Sec. 401(a)(4) rules due to the composition of the closed class or to the benefits, rights, or features provided to the closed class if specified provisions are met. Thus, the bill would allow for expanded cross-testing between an employer’s defined benefit and defined contribution plans for purposes of the nondiscrimination rules.

Under the hardship withdrawal rules, a distribution would not fail to be treated as a hardship distribution solely because an employee did not take an available loan under the plan. The current rule prohibiting a participant from making plan contributions for a six-month period after taking a hardship withdrawal would also be repealed. Under the provision, employers may further choose to allow hardship distributions to include account earnings and employer contributions.

The required period for the rollover of plan loan offset amounts in certain cases would be extended. Under this provision, employees whose plan terminates or who separate from
employment while they have plan loans outstanding would have until the due date for filing their tax return for that year to contribute the loan balance to an IRA in order to avoid the loan being taxed as a distribution.

The House bill would also repeal the special rule, in Code Sec. 408(A)(d), that permits the recharacterization of Roth IRA contributions as traditional IRA contributions. According to a summary of the House bill, this provision is intended to prevent taxpayers from gaming the system by, for example, contributing to or converting to a Roth IRA, investing aggressively and benefiting from any gains (which are never subject to tax), and then retroactively reversing the conversion if the taxpayer suffers a loss so as to avoid taxes on some or all of the converted amount.

Reaction to potential changes in 401(k) contribution limits

In recent weeks, there has been widespread discussion about a possible reduction in the limit for pre-tax contributions for 401(k) plans. The initial version of the House tax bill does not include any changes to the 401(k) pre-tax contribution cap.
Such a suggestion has proven to be unpopular. According to a late October poll conducted by Morning Consult/Politico, 57 percent of nearly 2,000 registered voters oppose reducing the 401(k) pre-tax cap to $2,400 while only 25 percent of respondents supported the proposal. Additionally, 50 percent of respondents said that reducing the pre-tax contribution limit would cause the average American to contribute less to their 401(k) plans. Employees under the age of 50 can currently contribute up to $18,000, on a pre-tax basis, to their 401(k) plans, a number which increases to $18,500 for 2018. Employees age 50 or over can contribute an additional $6,000 catch-up contribution under current law.

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