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Tax Cuts and Jobs Act of 2017

America’s Retirement System Largely Unaffected

Today, both houses of the United States Congress voted for and passed the Tax Cuts and Jobs Act (H.R. 1), and it is expected the President will sign it into law. Leading up to finalization of the tax bill, many feared America’s private retirement system—most notably 401(k) plans—would be negatively impacted by tax reform. Thankfully, however, today’s passed legislation largely left workplace-sponsored plans alone.

As has been well covered by popular press, the two most vaunted changes brought about by this act—all of which begin in 2018—include slashing corporate tax rates from 35 to 21 percent. And, on the individual side, the seven individual tax brackets were adjusted and rates lowered. Please click here to read our early assessment of these changes on U.S. stocks, bonds, and the housing market.

Beyond the investment aspects, several retirement-related provisions have implications for individual retirement accounts (IRAs), but our initial read is that their impact is small and limited. The one provision that may affect many of our plan sponsor clients can be found in Section 13613, which provides an extended rollover period for certain plan loan offsets by extending the deadline to avoid having a plan loan treated as a taxable distribution for individuals who fail to meet loan repayment terms because of plan termination or separation from service. This provision will allow employees to rollover the loan balance to an IRA or other plan by the due date for filing their tax return (including extensions). Previously, the deadline was 60 days.

Lastly, it is worth noting that, to reduce the differential in tax rates between C-corporations and pass-through entities, the new law allows pass-through entity owners deductions (which vary depending on an individual’s adjusted gross income) designed to cap the marginal tax rate they pay. While this provision does not create absolute parity between the various business structures, it does have the potential to slightly reduce some of the incentive to start or maintain a 401(k) plan (compared to today’s tax code). While this is something we will be watching, we are not concerned about a meaningful negative reaction from pass-through entity business owners. 

We will continue to monitor developments out of Washington and let you know if our thinking on the impact of the Tax Cuts and Jobs Act changes. As always, please let us know if you have any questions.