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11/02/2017

PSCA Member Alert: Tax Reform - 401(k)/403(b) Pre-tax Contributions Unaffected

One summary of the Tax Cuts and Jobs Act, HR 1, released this morning by the House of Representatives, Ways and Means Committee, states, in part:  

"...The Tax Cuts and Jobs Act makes no changes to the popular retirement savings options that Americans have today - including 401(k)s and Individual Retirement Accounts, or IRAs.  Americans will be able to continuing making both traditional, pre-tax contributions and "Roth" contributions in the way that works best for them..." 

The tax reform bill released today did not include any provision that would limit our ability to make pre-tax contributions, nor reduce the amount that can be contributed to a 401(k) or 403(b) plan.  As you know, there was much discussion about limiting the amount that could be contributed on a pre-tax basis as a way to offset the cost to reduce marginal federal income tax rates (so-called "Rothification").  And, as we noted in prior releases, PSCA and other retirement industry parties offered input earlier this year which helped Congress avoid a repeat of the Tax Reform Act of 1986 reduction in the maximum that can be contributed to a 401(k) or 403(b) plan on a tax-deferred basis. 

A cursory review of the 400+ page bill identified a few proposed changes to retirement benefits:

  • Section 1502 includes a change to Internal Revenue Code Section 401(a)(36) (IRC §401(a)(36)) that primarily affects defined benefit pension plans.  A plan may provide for commencement of benefits prior to separation, but after age 62.  The proposed change would reduce the limit to age to 59 1/2.
  • Section 1503 includes a change that will modify Treasury Regulation §1.401(k)-1(d)(3)(iv)(E) to delete the six month suspension of contributions after a hardship withdrawal. 
  • Section 1504 includes a change that enables a plan sponsor to amend their plan to make available more assets when a hardship withdrawal is elected - to include qualified nonelective contributions, qualified matching contributions and earnings on contributions eligible for hardship withdrawal.  Section 1504 also clarifies that a plan need not require participants take a plan loan prior to electing a hardship withdrawal.  

We are pleased to see that as of now, 401(k), 403(b), and IRA savings provisions are unaffected.  Thank you to all of our members who raised their voices and let their legislators know that maintaining existing savings provisions is essential. Together, we are making a difference in the ability of all Americans to obtain a financially secure retirement. 

Of course, this is the initial proposal and there is a long road to travel before this proposal becomes law.  Changes remain a possibility.  In that light, PSCA will continue to participate in the Save Our Savings Coalition to maintain existing choices and provisions.   

PSCA will continue to be your voice in Washington, working to preserve, improve, and expand retirement savings.