How Will Tax Reform Affect Retirement Savings?
In government, the one constant is change. New laws are forever going into effect that change the way employers do business. As an HR professional, keeping up with legislative changes can feel like a full-time job in and of itself. But when new laws are passed or existing ones modified, it is your responsibility to pass along the information to affected employees.
Last month, House Republicans indicated changes to employee retirement plans might be forthcoming. Here’s everything you need to know about the proposed legislation.
Proposed Tax Reform Changes
In July, the House Ways and Means Committee outlined a tax reform plan that would directly impact employee’s retirement savings. Specifically, they are calling for the following changes:
- Instituting penalty-free ways for families to access their 401(k) and similar accounts to pay for expenses associated with a new child, whether through birth or adoption.
- Creation of a universal savings account that would allow for withdrawals at any time – not just at retirement. Employees would be given the opportunity to contribute up to $5,500 per year tax-free for investment in bonds and equities.
- Expansion of Section 529 education accounts to cover the costs of apprenticeship fees and home schooling, and to assist in paying off student debt. Employees would fund these plans through direct deposit contributions using after-tax dollars.
The Senate is looking at new tax legislation, as well. The proposed Retirement Enhancement and Savings Act (RESA) would allow small employers currently unable to offer 401(k) plans to band together and share administrative costs in order to make similar plans available. More participants would mean lower fees, making the prospect of working for a smaller company appealing to many who are otherwise reluctant to join an employer who does not offer a retirement savings plan. Other facets of this plan include:
- Permanently extending tax rate reductions for individuals and small business owners enacted in the 2017 Tax Cuts and Jobs Act. Currently these tax cuts are set to expire in 2025.
- Allowing startups to write off more of their initial costs.
Obviously both pieces of legislation are still pending and may not become law with all provisions intact, but being aware of these proposed changes in advance will help you prepare down the line.