Senate, in break with House, targets retirement funds, stock options in tax reform proposal
- If Republican senators successfully pass their tax reform bill as is, employees over age 50 will no longer be able to use pre-tax dollars to make catch-up contributions to their 401k plans, CNBC reports. Current law lets workers over 50 make pre-tax contributions of up to $6,000 above the $18,000 annual cap. An amendment by Sen. Orrin Hatch (R-UT) would allow employees over 50 to add an extra $9,000 to their retirement savings, but only in a Roth account, which requires after-tax contributions.
- A second Hatch amendment would eliminate Roth "recharacterizations," which let account holders undo these plans and save tax dollars. According to CNBC, recharacterizations work best for workers in low tax brackets. The Senate bill also puts a one-year deferment on catch-up contributions by workers earning $500,000 or more.
- Silicon Valley company heads are strongly opposed to the bill, which includes a proposal to tax employees' shares in private companies, Recode reports. More than 500 tech company officials, representing Facebook, PayPal, Airbnb, Uber and others, argue that start-ups offer stock options to attract and retain talent and that a tax on their investments could jeopardize recruitment.
The retirement-plan amendment is a "give and take" proposal — it's also quite different from the House's version, which did not ultimately include a provision that would affect pre-tax contributions. Although the Senate's bill raises the catch-up contribution by $3,000, it requires employees' to use after-tax dollars.
This could be a big change for employees; saving for retirement with pre-tax dollars and receiving matching funds from employers were incentives to opening a 401k account. Employees who expect to be in a higher tax bracket upon retirement may be at a disadvantage if they're saving catch-up contributions in Roth accounts.
GOP tax proposals will face challenges from Democrat lawmakers and probably undergo a series of amendments before any kind of reform occurs. But employers need to prepare themselves and their employees for possible changes as the process moves forward.
- CNBC Potential Senate tax tweak would curb pretax 401(k) catch-up contributions
- Recode Silicon Valley is trying to stop the U.S. Senate from taxing employees’ stocks while their companies are private
- US Senate DESCRIPTION OF THE CHAIRMAN’S MARK OF THE “TAX CUTS AND JOBS ACT”
- HR Dive House tax plan won't lower 401k pre-tax contributions cap