Graff: 'We Knew This Was Coming...'
Tax reform, that is, and its potential to vex the retirement community and those it serves. With those words, American Retirement Association CEO and ASPPA Executive Director Brian Graff reminded attendees at ASPPA's 2017 Annual Conference at National Harbor, MD, that the matter is pressing. "We're next," he said, as he noted that several other tax proposals floated as potential revenue enhancers have been walked back.
"One person's tax reform is another person's tax increase," Graff said. He noted that the Senate budget measure, which he said it is "likely the House will pass," allows $1.5 trillion net in tax cuts. The question, he said, is what the tax provisions will be.
Graff outlined some of the possibilities. One of the options recently discussed, "Rothification," he noted, is "not new at all." Graff, joined by ARA's General Counsel Craig Hoffman and Director of Retirement Policy Doug Fisher, said that it harks back to former House Ways and Means Chairman Dave Camp's (R-MI) 2014 proposals.
They addressed one of the most recent proposals: a cap on the amount one could put into a retirement account of $2,400 per year. "There's a lot of people who are contributing more than $2,400," noted Graff, adding that 60% of people would lose their up-front deductions. "We're really not happy with this. We don't think this is sensible policy."
"The 401(k) is not a piggybank for corporate tax cuts," said Graff, pledging that ASPPA will act to make sure this doesn't happen.
Another tax reform proposal would create a new 25% tax rate for businesses organized as pass-through entities. That rate would apply only to the business income portion of the entity's total income, with the compensation portion taxed at ordinary income rates. This, they said, could result in fewer businesses even offering a retirement plan in the first place. "We believe this is an unintended consequence" of the proposal, Hoffman said.
Fisher added that the "$64,000 question" is how the entity's total income is allocated, and that if it is enacted as part of a tax reform measure, service providers may ask themselves, "Do my clients in these pass-through entities need to go through the hassle of a retirement plan?" Hoffman agreed, telling attendees, "We believe it will be very easy for financial advisors to say, 'Don't put money in a plan'" if such a provision becomes law.
"They are actually doing this stuff," warned Graff, adding, "this is not a drill." And there is added risk, he noted, given all the current distractions. "We are worried this won't rise to the level that it needs to," said Graff.
Another possibility, they noted, is that the Retirement Enhancement and Savings Act of 2016 (RESA), which had been marked up by the Senate Finance Committee in September 2016 but never reached the floor of the full Senate for a vote and therefore was never enacted, may be reintroduced in this session of Congress. In fact, Hoffman called its reintroduction "imminent."
Among the proposals contained in RESA was a provision calling for pooled employer plans (PEPs), which would allow for open multiple employer plans (MEPs) with no commonality if certain requirements are met. And Graff expressed the view that this idea may have staying power. "This MEP/PEP thing isn't going away," said Graff.
Yet another issue that they said is "still percolating" is lifetime income disclosure, based on the Lifetime Income Disclosure Act, which would require ERISA defined contribution plans to include "annuity equivalent" calculations on benefit statements once a year.
Tax reform is not the only game in town, the panel noted. Graff said that he reminds people that the Department of Labor's fiduciary rule is essentially already in effect, and has been since June 7, 2016 — although the applicability date was scheduled for April 10, 2017 and was then extended to June 9.
"We expect the DOL will revisit the BIC provision" of the rule, said Graff. "This is an ongoing saga," he said, adding, "it's not going away."
And the federal level is not the only one on which fiduciary rules are being put in place. For instance, Nevada quickly put a fiduciary standard in place. And it may not be the last — Graff noted that other states are considering similar steps, and that other states tend to copycat such measures. "That's why we're working so hard on this," he said.
Trump Tweets Support for 401(k)s
In a noteworthy development, on the morning of Oct. 23, President Trump tweeted this: "There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!"