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Tax Reform Update — House Bill Contains No Changes to 401(k) Tax Incentives

Yesterday, House Republicans released their long-awaited tax reform proposal.  We were very pleased that they chose not to include any proposals that would have limited the pre-tax deduction for employee retirement savings. Our advocacy, including the many American Retirement Association members who reached out to their members of Congress, made a huge difference.
 
The final outcome, however is far from certain. The Chairman of the Ways and Means Committee has already said there will need to be changes to the bill, which will be announced before the committee considers the legislation next week. The Senate has not yet come out with its tax reform proposal, but it is expected to have some significant differences from the House bill. As such, we will continue to remain vigilant in protecting the incentives for retirement savings consistent with the Retirement Policy Principles for Tax Reform we published last month.  
 
Since its release, we have been carefully examining the over 400 pages of legislative text to evaluate other provisions that could have an impact on retirement plans. In particular, we are evaluating whether the reduced tax rate on pass-through business income as outlined in the tax reform plan could have a negative impact on the incentives for small business owners to establish and maintain a plan. As we have discussed with you before, if the business owner’s retirement contributions are deducted at 25 percent, but taxed at 35 or 39.6 percent when withdrawn, this would completely undermine the economic incentives for the business owner to establish and save in a retirement plan. 
 
While most of the current focus has been on Rothification, the House tax reform proposal did include a handful of retirement policy provisions, including a provision to simplify hardship distributions that we have supported for some time. You can read a summary of those changes here.
 
In light of the fact that “Rothification” was not included in the current bill, and to give us the time necessary to evaluate the likely impact of the comprehensive tax reform bill, we have decided to postpone Friday’s webcast update until we are able to provide a better assessment of the impact not only of what emerges from the House, but from the Senate’s version, which is currently expected to be available in the next couple of weeks. In the meantime, be assured that we will continue to keep you apprised as relevant developments occur.
 
Thank you again for your interest and support of our efforts here.