What Does Tax Reform Portend?
President Trump signed the Tax Cuts and Jobs Act of 2017 (TCJA) into law just before Christmas. The debate over tax reform roiled Washington, and the retirement plan community was among the many parties concerned about the outcome. A recent white paper discusses the new law and its possible effects, including those on retirement plans.
In the Wolters Kluwer white paper “Tax Cuts and Jobs Act Will Present Retirement, Benefits, Executive Compensation and Payroll Professionals with New Challenges in 2018,” Wolters Kluwer Senior Pension Law Analyst Glenn Sulzer provides his take on what the new tax law may portend for retirement plans and benefits.
The main thrust of the TCJA is not retirement plans, the paper observes, but personal and corporate tax rates. It says that the TCJA “does not uproot pension and benefits arrangements as radically as past legislation” and that “from a retirement plan and executive compensation perspective” it is surprising that the changes the new law makes concerning retirement plans are as limited as they are, “especially when compared to proposed reforms that had been included in previous incarnations of the Act.”
Nonetheless, says the paper, the TCJA will have some effects. “The new rules will present employers, employees and tax and benefits professionals with potentially difficult decisions in the areas of retirement planning, employee benefits management, executive compensation and payroll administration,” the paper cautions.
Sulzer highlights the following provisions of the TCJA:
- the repeal of the rule permitting recharactization of Roth conversions
- extension of the period during which a qualified loan offset amount must be rolled over to an eligible retirement plan to the due date, including extensions, for filing the income tax return for the year in which the loan offset occurs
- extending the relief from the 10% penalty tax for early distributions when they are qualified 2016 disaster distributions from qualified plans, 403(b) plans and IRAs.
The paper, and Sulzer, also addresses the impact of the revised pass-through deduction rules. In fact, they warn, that impact could be major, saying “While the rules governing retirement plans may not be directly affected by the law, the modification and expansion of the deduction for pass-through income could have a serious effect on currently maintained retirement plans.” And, they add, “pursuant to the law of unintended consequences, the new pass-through rules could effectively function as a disincentive to small employers to the establishment and continued maintenance of qualified plans.”
Sulzer writes that there is concern that under the TCJA, small business owners may choose to pay tax on income at the lower pass-through rate instead of contributing the income to a qualified plan. He also notes that the American Retirement Association highlighted concern that since the new tax law allows small business owners with qualified income to apply income tax at the lower marginal rate, the TCJA will discourage directing income to maintain contributions to a retirement plan, which will be subject to higher taxes at distribution.
“The broad sweep of the Tax Cuts and Jobs Act suggests its disruptive force,” the paper says. But it adds a caveat, noting that its true impact “will not be fully known until implementation of the provisions begins in earnest” and that the regulatory guidance, possible anti-abuse measures and technical corrections legislation may help — or hurt — the implementation process.