2025’s Tax Sunset and DC Plans

The first article in this quarter’s PLANADVISER In-Depth series, which considers the state of retirement in the U.S., looks at the potential for policymakers to look at tax-deferred workplace programs to make up revenue.

As the federal deficit balloons and 2025 nears—bringing the expiration of many provisions from the Tax Cuts and Jobs Act of 2017—some industry experts worry that 401(k) and other tax-deferred programs will be in the spotlight for reductions.

The National Association of Plan Advisors, for instance, said earlier this year that the retirement plan advisory industry must guard against potential scale-backs.

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Tax-deferred savings plans have become a cornerstone for how many Americans save for their futures. But “as one of the two largest tax expenditures in the federal budget along with health care, the pension tax preferences will be seen as a prime source of revenue that might be repurposed,” says Mark Iwry, a former senior adviser to the U.S. Secretary of the Treasury who is currently a nonresident senior fellow at the Brookings Institution. “There will be competition for limited tax dollars, as there always is, and the large tax preference for retirement savings will present an inviting target.”

Potential for Unprecedented Reductions

Historically, there is not much precedent for cutting these tax-deferred savings to help with the federal deficit, says William McBride, vice president of federal tax policy at the Tax Foundation.

“These are popular programs,” McBride says, specifically calling out 401(k)s, health savings accounts and 529 college savings accounts. Despite HSAs still being underutilized more than 20 years after their inception, “they’re considered untouchable.”

McBride says that, based on conversations with employees on Capitol Hill who work in these areas, the general consensus is that rollbacks of these incentives are not on the table.

But he acknowledges that this is an unprecedented situation due to the size of the deficit the U.S. is incurring: The debt is rising at an unsustainable trajectory in the coming decades, the Congressional Budget Office’s most recent budget outlook showed.

“In that sense, we could be doing things that are unprecedented, and we could be doing those things very soon,” McBride says. “It’s certainly possible. I’m just saying that, to date, we haven’t gone there.”

Many members of Congress find the tax cuts passed in 2017 to be good policy and are likely going to want to renew at least some of the benefits—and that will come at a cost, says Michael Kreps, chair of the retirement services group at the Groom Law Group.

Covering that cost could either come in the form of raising taxes or limiting the tax deductions, exclusions and other exceptions that exist in taxation. In 2017, making adjustments that would have made it more difficult for people to save for retirement was a leading proposal to pay for tax reform.

“When push comes to shove and they need to raise $5 trillion to $6 trillion, they’re going to be looking for material revenue raisers,” Kreps says. “In the court of congressional scoring, the retirement system is one of the larger tax expenditures.”

What Reductions Could Look Like

There are various ways these rollbacks could happen, if they happen at all, Iwry says. One is additional “Rothification” of the 401(k) system, which could pick up where SECURE 2.0 left off by requiring more of the existing tax-favored contributions to take the form of Roth in order to appear to save revenue.

“The Rothification of catch-up contributions—essentially imposing lower limits on pre-tax contributions—could also be extended to non-catch-up contributions,” Iwry says. Alternatively, there could be proposals that further limit tax-favored contributions, whether Roth or pre-tax, or restrict retirement savings tax preferences in other ways.

Kreps says this “Rothification” is much more likely than lowering contribution limits, which would be a very unpopular move.

Bolstering the 401(k) Against Potential Tax Reductions

It will be incumbent upon advocates for the system to make sure that policymakers understand the real damage that would occur in cutting back incentives for retirement savings, says Brian Graff, CEO of the American Retirement Association.

“Every other industry is going to be lining up to protect its stuff, whether it’s energy, defense [or] insurance,” Graff says.

He added that while industry actors sense risk, not everybody agrees on the degree of that risk—and the degree of risk will be contingent on the upcoming presidential election.

“From ARA’s perspective, we are getting prepared,” Graff says.

In 2017, a coalition called Save Our Savings sought out to try and protect elements of the system, and Graff says similar coalitions could emerge this year. Save Our Savings was extremely effective, Kreps adds.

“There were no material changes to the tax incentives for retirement savings in the Tax Cuts and Jobs Act, and that was entirely due to the fact that that coalition convinced Congress—and quite frankly, the administration at the time—that it was a political loser to attack the retirement system,” Kreps says.

Education and advocacy are an important part of protecting retirement savings programs. But the best defense for the private pension system is to “do more of what should be done in any event,” Iwry says.

That includes reforming the system to make it more inclusive, equitable and pension-like, as well as expanding coverage through automatic individual retirement accounts nationwide. It also means, to Iwry, “reducing leakage and reorienting the system around the worker and retiree, especially those moderate- and lower-income households who most need the help.”

 

 

More on this topic:

How to Contribute Amid Retirement ‘Challenges’
Social Security: Beyond the Headlines
Define ‘Crisis’

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