Just as they appeared to survive round one of the House tax reform bill released last week, retirement savings programs, such as 401(k) plans and Individual Retirement Accounts, seem to emerge relatively unscathed from the Senate’s tax reform deliberations. Nonetheless, the Senate Finance Committee’s proposal does include a few changes to these programs.

  • Aggregation of Contributions. Under current law, there is generally a single aggregate limit for elective deferrals to 401(k) and 403(b) plans. The proposal brings governmental section 457(b) plans into this mix by applying an aggregate limit to contributions for an employee in a governmental section 457(b) plan and elective deferrals for the same employee under a section 401(k) plan or a 403(b) plan of the same employer. The proposal also imposes the current 401(k) plan limits on elective deferrals and catch-up contributions for 403(b) plans and governmental 457(b) plans – eliminating special rules that raised the limits for these types of plans in some situations.
  • Early Withdrawal Penalty for Governmental 457(b) Plans. Under current law, distributions from qualified retirement plans, section 403(b) plans, and IRAs before age 59½ are subject to an early withdrawal tax that, generally, is equal to 10 percent of the distribution amount includible in income. The proposal applies a similar early withdrawal tax to distributions from governmental 457(b) plans.
  • Catch-Up Contributions. Under current law, employees age 50 or older are permitted to make “catch-up” contributions (that exceed annual limits) to 401(k) plans, 403(b) plans, governmental 457(b) plans and IRAs. The proposal would not permit employees to make catch-up contributions for a year during which they earned $500,000 or more.

Legislative language will follow the completion of the mark-up of the proposal, which appears slated for the end of next week. Much can change between now and then. What’s more, the Senate proposal does not comply with the “Byrd Rule” – as it produces annual deficits more than 10 years after its enactment. If the deficit in the out-years remains, the Byrd Rule would require approval of the bill by two-thirds of the Senate, rather than a simple majority. As a result, Finance Committee Republicans may be looking for additional revenue when they mark-up the proposal next week. As we have noted before, the tax-advantaged status of retirement savings plans is fertile ground for such purposes. Stay tuned to see whether the Senate or the conference committee of House and Senate members, that will be formed to negotiate a final compromise bill, circle back to retirement savings programs to troll for offset dollars.