As the topic of tax reform continues to dominate the news cycle, don’t just pay attention to the hot topics like tax brackets, mortgage interest deduction and the AMT! There’s some potential changes on the horizon for employer-sponsored benefits and employers and employees alike are going to be affected.
Congress recently took steps to pave the way for tax reform by passing the FY2018 Budget Resolution. This roadmap greases the wheels for comprehensive tax reform to be taken up this fall by lawmakers. The budget also provides the necessary mechanism which requires only a simple majority in the Senate to pass sweeping tax reform.
As you may have guessed, paying for tax reform can be just as tricky as trying to reform the system to make it simpler and fairer. Current cost estimates add 1.5T to the Federal deficit. Yes, that’s Trillion! So, to offset some of the cost of a tax package, Congress will be leaving no stone unturned. And the amount of lost revenue associated with employer-provided benefits is a pretty large stone!
The tax deferral of retirement plan assets is the second largest loss to the U.S. Treasury. But here’s the thing – it’s a deferral, not a loss. When a participant draws down on their benefit upon retirement, the government receives the tax on that benefit. Many defined contribution retirement accounts, like 401(k), 403(b), operate this way. Others, like traditional ROTH accounts, tax a participant’s contribution as it’s made into the retirement account.
Why does this matter? Congress could decide to drastically lower the limits on the amount you can put into a defined contribution account (current amount for 2018 will be $18,500). In the process, they would remove income limitations to ROTH accounts, allowing participants to split their contributions to two different types of accounts.
Confused yet? This shift allows the government to tax retirement benefits earlier in the process, generating billions of dollars. Remember that large price tag of comprehensive tax reform? Well, taxation of employer provided benefits could be just one trick Congress uses to alleviate that. And it could affect more than just retirement – fringe benefits like transit subsidies and employer-provided education assistance could also be targeted.
So, as we head down the tax reform path, remember – the devil is in the details. As an HR professional, inform yourself by reading SHRM’s HR Issues Update or following me at @SHRMKathleen to hear about how tax reform will affect employer-provided benefits.