Tax Reform 2.0 Framework Expands Retirement Savings Options

GOP package would create universal savings accounts

Stephen Miller, CEBS By Stephen Miller, CEBS July 27, 2018
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Tax Reform 2.0 Framework Expands Retirement Savings Options

Employer-sponsored retirement plans could get a makeover in the next round of tax reform, according to House Republicans.

On July 24, House Ways and Means Committee Chairman Kevin Brady, R-Texas, released an outline of what Republicans are calling Tax Reform 2.0, a package intended to build on the cuts enacted late last year. The reform calls for boosting retirement savings by:

  • Allowing families to access their 401(k) and similar accounts penalty-free to pay expenses related to a new child, whether through birth or adoption, with the ability to replenish those accounts in the future.
  • Creating a new universal savings account as a general savings account. Withdrawals could be made at any time, not just at retirement. Although specifics are still to come, earlier legislation to create universal savings accounts, introduced in 2015, would allow participants to annually contribute $5,500 of after-tax money. The money could be invested in bonds and equities and grow tax free.
  • Expanding Section 529 education accounts to pay for apprenticeship fees to learn a trade, cover the cost of home schooling and help pay off student debt. Section 529 plans are funded by employees, often with direct payroll deposits made into the plan with after-tax dollars.

In the Senate, lawmakers are considering the Retirement Enhancement and Savings Act (RESA), which SHRM supports. Among its provisions, RESA would allow small employers to band together to offer 401(k)-type plans, dividing plan administrative costs among more participants and lowering fees.

The Tax Reform 2.0 framework also calls for:

  • Permanently extending the reduced tax rates for individuals and some business owners under the Tax Cuts and Jobs Act, passed last year. The individual rate cuts are now due to sunset in 2025.
  • Letting startup businesses write off more of their initial costs.

"We plan to work off this framework to build on the growing successes of the Tax Cuts and Jobs Act and ensure this energized economy continues moving forward," Brady said in a statement.

The Society for Human Resource Management (SHRM) "looks forward to working with lawmakers as they develop legislative text to ensure that employer-sponsored benefits are preserved and strengthened," said Chatrane Birbal, director of congressional affairs for health and employee benefits policy at SHRM.

Even if legislation based on the framework were passed by the House, it would face the daunting prospect of being approved in the Senate, where the GOP holds only a razor-thin majority.

Universal Savings Account Concerns

"A bedrock of sound fiscal and savings policy is ensuring that every U.S. employee has the opportunity to save and plan for retirement," Birbal said. "Public-policy efforts at both the federal and state levels should focus on expansion of and access to benefits, including retirement accounts and employer-provided education assistance. To that end, SHRM supports tax incentives to expand access to and participation in these plans."

She added, however, that "while [the accounts are] well-intended, we remain concerned that universal savings accounts, which are designed to incentivize general savings, will discourage retirement savings and potentially serve as a catalyst to lower limits on contributions to traditional 401(k)s and IRAs."

A blog post from the Tax Foundation, a Washington, D.C.-based nonprofit that advocates for "smarter tax policy," appears to champion universal savings accounts as a more flexible alternative to traditional retirement accounts. "Currently, the tax treatment of retirement savings is riddled with restrictions, limitations and rules that differ across more than a dozen types of retirement accounts," the group said. "Though the framework does not specify how lawmakers would reform the current structure of retirement savings, the creation of a universal savings account would be a significant improvement over today's long-term savings options."

Expanding Tuition Benefits

SHRM supports tax incentives to expand education assistance, Birbal said. According to SHRM's 2018 Employee Benefits Survey, which polled HR professionals earlier this year:

  •  51 percent of respondents indicated that they offered undergraduate educational assistance.
  • 49 percent responded that they offered graduate educational assistance.
  • Just 11 percent offered a 529-plan payroll deduction.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Although Section 127 was not specifically mentioned in the Tax Reform 2.0 framework, "SHRM will continue to advocate in support of the expansion of tax code Section 127, which allows an employee to exclude from income up to $5,250 per year in education assistance provided by their employer," Birbal said. 

Unlike a 529 payroll deduction plan, under Section 127 neither the organization nor the employee pays federal income tax on the amount of the benefit received. As enacted in 1978, "the original benefit amount of $5,250 was originally intended to allow employers to cover the entire cost of an employee's education," Birbal noted. "The amount has not been increased or adjusted in almost 40 years."


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