How Tax Reform Could Affect Retirement Plans

Several proposed tax reforms would restructure how retirement vehicles are taxed and could negatively impact retirement plans in a number of ways.

By Kevin McGuinness | July 15, 2014
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In her recent paper, “How Tax Reform for Retirement Plans Can Affect Risk and Compliance,” Marcia Wagner, principal and founder of the Wagner Law Group, talks about how retirement vehicles such as 401(k) accounts are not taxed until a participant takes a distribution and how these vehicles are seen by some lawmakers as a potential source of revenue.

With the federal budget deficit being what it is, says the Boston-based Wagner, there are various proposals in the pipeline that look to update the architecture of retirement vehicles and thus provide more revenue that could be used to alleviate the deficit. The ones covered in Wagner’s paper include:

When asked about how the proposed 2014 Tax Reform Act (TRA) and how freezing the contribution limits for 10 years would generate revenues for the federal government, Wagner tells PLANADVISER, “Anything that has an after-tax status is revenue. It may well be that the time of annual contribution limits, and pre-tax limits in particular, is coming to an end.

“If this does turn out to be the case, there will definitely be a disincentive, especially in the non-highly compensated realm, to using after-tax retirement vehicles. On the one hand, people are not saving enough for retirement as it is. On the other hand, the country needs the revenue from the taxes the TRA would bring and may not be able to continue using the pre-tax model for retirement vehicles in the coming years.”

When asked if the need to keep track of both pre-tax and after-tax contributions for the TRA would increase the administrative burdens on retirement plans, Wagner says, “Yes, definitely. Many administrative systems will clearly have problems handing both. The question then becomes who is legally responsible for taking on this burden. It really opens up a whole hornet’s nest of trouble. Plan sponsors really need to be aware of the system capabilities, and limitations, of their recordkeepers. Plan sponsors will still need to follow due diligence steps when it comes to keeping records about pre-tax and after-tax contributions.”