What Now? 401ks in the Wake of Tax Reform

There is more interest 'in finding a national or consistent approach for addressing the retirement plan coverage gap'

401k, retirement, HSA, Ascensus, regulation, tax billDavid Musto, President, Ascensus Inc.

There are certainly many questions surrounding the 401k and retirement plan space as we head deeper into 2018—the impact (or not) of tax reform, the prognosis for health savings accounts and the push for state-run plans, to name a few.

Luckily, David Musto, president of technology and recordkeeping giant Ascensus, has answers, and specific ones at that. He sat with 401(k) Specialist for a comprehensive interview of what the near-future holds.

Q: What’s your view of the tax bill and will it ultimately be good for retirement savers?

A: I think the biggest news is what didn’t happen, which is the avoidance of the additional caps, or the reduction in contribution amounts in pretax savings in 401k programs, traditional IRAs and the like. After much conversation and fear in some quarters about the “rothification” of the U.S. retirement system, that was not a component of the final law.

There is the extension of the period for rollers on 401k plan loans, and certainly providing that type of flexibility for workers we view as a positive. Of course, we never encourage defined-contribution savers to tap into their retirement funds if it can be avoided in anyway.

But particularly for individuals that may be at risk with an employer or leave an employer, having a bit more cushion to be able to put those dollars back into the plan and continue to benefit from the text advantage savings and investment opportunity is also a positive.

Q: So, will it help with the problem of 401k leakage?

A: Yes, it should. You want to be pragmatic about it, though, even with an extended period to the next tax season, certainly an individual that’s recently taken out that 401k loan was probably expecting or needed to pay that loan back over a much longer period of time. An individual is still compelled to come up with the funds to put it back into the program, but having a little bit more time is a benefit and should help to some degree with leakage concerns.

There were changes to the recharacterization of IRAs and the removal of the ability to recharacterize back from a Roth to a traditional IRA. I don’t know that that would be viewed necessarily as a positive, but I don’t know that it’s a significant hindrance to American savers that want to maximize their opportunity and tend to make wise choices in terms of which vehicles they would look to use.

I do think the fact that the ability to recharacterize an annual contribution between traditional and Roth IRAs, which has not been changed as a function of the legislation, remains positive in terms of providing individuals with good flexibility.

Slower cost of living indexing for IRAs and HSAs we would not necessarily put in the positive list. If anything, we hope it’s a reminder to savers that the opportunity to save more in the future may not always be as great as we perceive. Therefore, it leads us back to a key tenet that we’re always reinforcing through education with retirement plan participants and education savers and health care savers, which is to set aside as much as you can as early as you can to ensure that you really are gaining the benefit of that savings over time. Certainly, as it would be in the case of tax-advantaged savings programs, the more and the sooner, the better.

Q: For a lay journalist, can you explain the pass-through provision and its effect on 401ks?

A: [Laughter] Um …our ERISA team here that also focuses on tax policy has done a lot of work in this area, and I think they do a nice job of not only giving you the layperson’s description, but shedding a little bit of light on some of the considerations.

There has been some concern that these pass-through provisions could result in small-business owners being less incented to start up a work-based define contribution program. The layman reason for that is that the business owner would pay less tax that they would’ve previously on income that passes through from the company to their personal tax return. The view would be that some small-business owners might have put a workplace plan in place not only to benefit their participants, but also to benefit themselves in terms of maximizing the amount of money they get to set aside for retirement, in effect reducing their taxable rate.

Now that their taxable rate is going down, that might provide some incentive for them not to pursue a workplace plan. We certainly hope that is not going to be the experience, and there is a lot of technicalities to different eligible pass-through earnings and the types of institutions that are affected, and we’ll see how that plays out.

Q: If contribution limits were cut on 401ks, HSAs would have (most likely) grown in popularity. What does the future now hold for the latter?

A: To clarify my earlier point, contribution limits are not being cut, but the indexing of increases on those limits will now be cut shorter, so they’re using a new indexing model.

We know the escalating cost of health care, and the shift that’s occurring in the workplace of the responsibility for health care expenses by-and-large shifting significantly from companies to individuals. It mirrors, in many ways, the shift that we’ve seen over the last three decades in the retirement space from defined benefit plans paid for by companies to individuals savings in 401k programs.

Our view is that health savings accounts will only increase in importance as a savings vehicle for working Americans.

If you were to ask most people on the street if they’ve heard of a 401K or an IRA, you’d get a lot of head nods. The HSA is probably one of the most misunderstood or not understood savings vehicle, but with the shift to consumer-directed health care in many companies, it’s certainly finding its way into the consciousness of most workers and I think you’re gonna see more and conversations about it in the media and the like.

Q: How, if at all, does the tax bill and recent legislative events affect the push for state-run retirement plans?

A: So, no direct impact on state-sponsored programs. As we speak, the fact that we were talking about IRA re-categorization before, the ability to recharacterize an annual contribution is very important in those programs. In the state of Oregon, as an example, that program is set up to be a Roth IRA deduction, so for families and individuals that would not be eligible for a Roth IRA, those dollars would need to be recharacterized at the end of the year. So, good news, right? The fact that that rule has not been changed does not adversely impact the goal and potential success of the state-sponsored programs.

What we do see happening in the dialogue with policymakers and others is this interest in finding a more national or consistent approach for addressing the coverage gap in those that have access to workplace savings programs. The states have done a great thing in pursuing an area that had not been addressed nationally at a federal level.

Our view would be that the more, the better in terms of ideas and programs that can help address this gap. There have been proposals recently that would make MEPs, or multiple employer plans, more attractive and we think that’s a great solution to the degree that it also increases the number of the plans that are created to cover what’s a very large percentage of working Americans that still do not have access to a 401k or defined contribution program.

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