Dive Brief:
- A draft tax reform bill released by the U.S. House of Representatives Thursday did not include a provision to lower the cap on employees' pre-tax contributions to employer-sponsored 401k plans, according to multiple reports.
- That's contrary to prior speculation on Capitol Hill that Congressional Republicans were considering just that. The New York Times reported earlier this week that members of the GOP floated the idea of reducing the $18,000 cap on pre-tax 401k contributions to $2,400. That would have effectively "Rothified" a significant portion of retirement funds, said BenefitsPRO.
- The House's bill also introduces a cut in the corporate tax rate (down to 20% from 35%). The bill does not include a repeal of the individual mandate under the Affordable Care Act, according to Bloomberg.
Dive Insight:
Cue the collective sigh of relief from 401k participants and providers. For now, Congressional observers await the rest of the budget reconciliation process; like the healthcare reform efforts before it, the new tax plan faces a considerable uphill climb.
That's because, like the healthcare reform efforts that preceded it, the tax proposal must be passed on the House floor, after which it'll likely be rewritten in the Senate. Even if the House's version made provisions to shrink 401k contributions, employers wouldn't have had to make immediate changes necessarily.
That advice still holds true at this point, Robyn Credico, national director of defined contribution consulting at Willis Towers Watson, told HR Dive. "If I were an HR manager, I would wait," she said. "It's too soon to know what the final rules are going to be. Your plan should maybe stay the same."
The Internal Revenue Service (IRS) recently announced that it would increase the cap on employees' 401k contributions to $18,500 in 2018. That's good news for workers, but employers will have to communicate the change loud and clear in order for workers to stay in the know. Benefits communication and education are painfully inadequate among the majority of employees.
In the short term, Credico said that push should include education about alternative account forms, including Roth IRAs, which may be better in the long term for younger workers who expect their earnings to rise over the course of their careers. But the fact remains that 401k plans remain untouched by the recent flurry of legislation, and Credico expects it to stay that way.
"For the last eight years, both parties talked about retirement plans and turning pre-tax contributions into Roth contributions," Credico said, "and it has never happened."
