4 Ways Senate Tax Bill Hurts Retirement Plans

While Rothification of 401(k) plans was not part of the Senate tax overhaul bill released late Thursday, the bill does include several negative provisions for retirement savers.

The most detrimental change places a cap on catch-up contributions for high earners, according to Brian Graff, CEO of the American Retirement Association, a trade group for retirement plan and pension professionals.

The extra contributions would be prohibited for workers making more than $500,000, but Graff worries that the cap could be lowered.

“Capping the ability to make catch-up contributions undermines the incentives of business owners to adopt and support retirement plans,” Graff said. “It’s a dangerous precedent — after all, what’s to stop lawmakers to decide to impose a limit of $250,000 or $125,000?” 

Graff points to the four provisions he finds worrisome in the Senate tax bill, the Tax Cuts and Jobs Act:

• prohibits catch-up contributions for people making more than $500,000;
• eliminates 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;
• applies the 10% early withdrawal tax to governmental 457 plans; and
• includes the same provision dramatically limiting nonqualified deferred compensation that was part of the House bill but taken out of it on Thursday.

As ARA explains, “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 House Ways and Means Committee passed its bill on Thursday. Senate Finance Committee Chairman Orrin Hatch, R-Utah, said his committee will begin marking up its proposal on Monday.

The House and Senate tax plans differ on several fronts. Here’s a breakdown:

Individual Income Tax Rate and Brackets

The House bill consolidates the current seven income tax rates into four, while retaining the top marginal rate of 39.6% and including an income recapture provision that phases out of the effect of the 12% bracket for high-income earners, sometimes called a “bubble rate,” according to the Tax Foundation.

The Senate bill retains the seven brackets while reducing rates, and lowers the top marginal bracket to 38.5%.

Estate Tax