As expected, President-Elect Trump’s pick for Treasury Secretary has thrown down the gauntlet on tax reform — and that’s not likely to be good news for retirement plans.
“Our No. 1 priority is tax reform. This will be the largest tax change since Reagan,” said Steven Mnuchin, the former banker who served as Trump’s campaign finance chairman, in an interview on CNBC.
He was referring, of course, to the Tax Reform Act of 1986 (TRA ’86), which significantly simplified and streamlined income tax rates. Of course, it also tightened the nondiscrimination rules, reduced the maximum annual 401(k) before-tax salary deferrals by employees by 70%, and required all after-tax contributions to DC plans to be included as annual additions under Code Section 415 limits — and what did all that do for — or rather to — retirement savings?
Yes, for all the concerns expressed by those in our nation’s capital (and presumably those soon to be taking up residence there), tax reform is all about reducing the amount of revenue that the federal government takes in, but with a $20 trillion debt, Uncle Sam will need to find some way to offset the projected loss in revenue — and that’s where the tax incentives to establish, fund, and contribute to, a workplace retirement plan inevitably find themselves in the budgetary crosshairs.
While those paying attention to such things realizes that most of those tax preferences are temporary — that is, taxes will be paid on those employer, pre-tax contributions and the earnings thereon when they are withdrawn, the government beancounters look at revenues and expenditures within a 10-year window, and since the payment of most retirement benefits occurs outside that window, the amount of taxes postponed looks, from a budgetary standpoint, to be taxes permanently foregone. And, on that basis, even though the retirement preferences are completely different from other tax deductions, from a budgetary scoring standpoint, it’s a big, juicy target.
We saw what that might mean as recently as 2014 when then-Chairman of the House Ways and Means Committee Rep. Dave Camp (R-Mich.) put forth a proposal that would pay for tax reform (or at least some of it) by freezing the COLA limits that apply to defined contribution plans for a decade and limiting the annual ceilings on elective deferrals so that only half could be made on pre-tax basis (weirdly, this would have applied only to employers with more than 100 workers). The first part of the proposal was deemed to raise $63.4 billion in revenue over 10 years, the latter an additional $144 billion, by basically forcing workers who would otherwise have taken advantage of pre-tax savings to pay taxes on those contributions upfront. And let’s not forget that those burdens would have fallen particularly harshly on those who decide to offer these plans in the first place and to match employee contributions.
Nor is Mnuchin alone — less than 24 hours after Donald Trump’s stunning victory, the Chairman of the House Ways & Means Committee was also talking tax reform.
So, gear up — looks like we’ve got a battle on our hands!
“Our No. 1 priority is tax reform. This will be the largest tax change since Reagan,” said Steven Mnuchin, the former banker who served as Trump’s campaign finance chairman, in an interview on CNBC.
He was referring, of course, to the Tax Reform Act of 1986 (TRA ’86), which significantly simplified and streamlined income tax rates. Of course, it also tightened the nondiscrimination rules, reduced the maximum annual 401(k) before-tax salary deferrals by employees by 70%, and required all after-tax contributions to DC plans to be included as annual additions under Code Section 415 limits — and what did all that do for — or rather to — retirement savings?
Yes, for all the concerns expressed by those in our nation’s capital (and presumably those soon to be taking up residence there), tax reform is all about reducing the amount of revenue that the federal government takes in, but with a $20 trillion debt, Uncle Sam will need to find some way to offset the projected loss in revenue — and that’s where the tax incentives to establish, fund, and contribute to, a workplace retirement plan inevitably find themselves in the budgetary crosshairs.
While those paying attention to such things realizes that most of those tax preferences are temporary — that is, taxes will be paid on those employer, pre-tax contributions and the earnings thereon when they are withdrawn, the government beancounters look at revenues and expenditures within a 10-year window, and since the payment of most retirement benefits occurs outside that window, the amount of taxes postponed looks, from a budgetary standpoint, to be taxes permanently foregone. And, on that basis, even though the retirement preferences are completely different from other tax deductions, from a budgetary scoring standpoint, it’s a big, juicy target.
We saw what that might mean as recently as 2014 when then-Chairman of the House Ways and Means Committee Rep. Dave Camp (R-Mich.) put forth a proposal that would pay for tax reform (or at least some of it) by freezing the COLA limits that apply to defined contribution plans for a decade and limiting the annual ceilings on elective deferrals so that only half could be made on pre-tax basis (weirdly, this would have applied only to employers with more than 100 workers). The first part of the proposal was deemed to raise $63.4 billion in revenue over 10 years, the latter an additional $144 billion, by basically forcing workers who would otherwise have taken advantage of pre-tax savings to pay taxes on those contributions upfront. And let’s not forget that those burdens would have fallen particularly harshly on those who decide to offer these plans in the first place and to match employee contributions.
Nor is Mnuchin alone — less than 24 hours after Donald Trump’s stunning victory, the Chairman of the House Ways & Means Committee was also talking tax reform.
So, gear up — looks like we’ve got a battle on our hands!
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