What’s Happening with 401(K) Plans?
Word out of Washington is that Congress may be posed to pass legislation that would make the most sweeping changes to retirement plans, including 401(k) plans, in over a decade. There is a push in the House for tax reform to become law later this summer or early fall, coupled with a bipartisan Senate bill. Either one of these proposals could easily serve as a vehicle for substantive retirement plan reform.
Although details are very sketchy at best – leading to more questions than answers at this point — among the changes rumored to be under consideration are:
- A new type of employee saving account designed to be “open ended” (no, we don’t know what this means either);
- Expanding the ability for participants to tap into retirement savings in the event of emergencies;
- Repeal of the current rule preventing individuals who have attained age 70½ from contributing to individual retirement accounts (“IRAs”). (It is unclear whether or not the similar rule, that forces most individuals who have attained age 70½ to take “required minimum distributions” from IRAs, will remain in place);
- Requiring 401(k) plans to disclose to participants the monthly annuity income that their account balances would support;
- Provisions that would encourage small employers to offer automatic enrollment, thus easing the burden of offering 401(k) plans; and
- Provisions that would permit employers to allow participants to defer beyond ten percent (10%) of their compensation.
In addition, recall that, at the very last minute, proposals that would have made major changes to Roth contributions made to 401(k) plans were removed from last year’s tax reform legislation. These changes would have, in one way or another, modified the ability of participants to make pre-tax, regular 401(k) contributions, and instead would have required participants to make more after-tax Roth contributions. Although this revenue-driven provision didn’t survive the final cut in 2017, you can be sure that it will be reanimated at some future time – and could even make it into this summer’s legislation, should it materialize.
Being that this is an election year, it is difficult to predict the chances of this – or any other legislation – being enacted prior to November. And this Congress is especially divided when it comes to taxation issues. Also, we do not yet know the Administration’s stance on these or other retirement plan provisions. However, there is constant pressure from lobbyists on all sides of the retirement industry, and major changes to 401(k) are at some point inevitable – our guess would be as part of the next major piece of tax legislation.