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(Most) Retirement Reforms Rolled Back in Modified Mark

Late last night, Senate Finance Committee Chairman Orrin Hatch (R-UT) released a modified chairman’s mark for the Tax Cuts and Jobs Act, with — mostly — good news for retirement plans.

The revised tax reform proposal embraced an amendment to the original proposal offered by Senator Rob Portman (R-OH), and supported by the American Retirement Association, that removed a proposal that would have severely limited deferred compensation plans. A similar proposal had been included in the original House GOP proposal, but dropped before being passed by the House Ways & Means Committee.

Mini-Rothification Dropped

The modified Senate version also drops the so-called “mini-Rothification" proposal that would have required all catch-up contributions by individuals making $500,000 or more be made as Roth contributions. This change had also been included in an amendment to the proposal offered by Portman.

Also dropped was a proposal that would have imposed the 10% early withdrawal penalty to distributions made prior to age 59½ from governmental section 457(b) plans. The proposal also adopts a provision seen in the House version that would extend the rollover period for participant loan offset amounts.

Pass-Through Problems Persist

However, the modifications to the Chairman’s Mark also greatly expanded the special tax deduction for owners of pass-through businesses, such that it now applies to all business owners making less than $500,000, including those performing professional services. The previous proposal had greatly limited the deduction to owners performing professional services with relatively minimal income – a restricted application that had tempered previous concerns as to the provision undermining the incentives to establish and maintain retirement plans. However, the expanded new provision (designed to make it easier for businesses to take advantage of the reduced business rate) seems likely to exacerbate the problem.

Our analysis is hampered by the fact that in the Senate, the Finance Committee uses a conceptual mark without actual legislative language. At this point it is not clear exactly how the deduction for retirement plan contributions allocable to the owner would actually work from a tax accounting perspective. This will certainly bear continued attention as the proposal works through the process.

What’s Next

The Senate Finance Committee will continue working on the legislation today, with an eye toward wrapping up its work by the end of the week. And, in addition to the retirement provisions, they have made several other significant changes, not the least of which is repealing the Affordable Care Act’s individual mandate. And whatever emerges will have to be reconciled with whatever emerges from the House.

Stay tuned.