Tax Reform Proposal Causing 401k ‘Pass Through’ Pain

However, there’s a simple solution

401k, retirement, tax reform, legislation,This could be a (big) problem.

American Retirement Association CEO Brian Graff has been a ubiquitous presence on LinkedIn and other social media platforms in recent weeks, conveying—in what seems like almost real-time—developments in the tax reform fight and their effects on 401ks.

The latest area of concern involves so-called “pass-through” provisions endemic to many small businesses, now threatened by last weekend’s developments.

“More than 90 percent of businesses are organized as pass-through entities (partnerships, S corps, and small business limited liability corporations), and more than 320,000 of these entities sponsor a retirement plan for their workforce,” the ARA said Thursday, citing its own analysis of the tax reform legislation. “Unfortunately, both the Senate and House tax reform proposals currently under review by the conference committee include provisions that could put the retirement of some 24 million hard-working Americans at risk.”

The reasoning is that “these proposals would reduce the tax rate on business income of these businesses, but would at the same time mean that many of those small business owners would be penalized financially for making retirement plan contributions, and for establishing a workplace retirement plan for their workers.”

And that’s before taking into account the additional financial burdens of contributions to meet plan testing rules and administration costs, ARA adds, not to mention the ERISA fiduciary risks associated with operating and administering a qualified plan.

“While the American Retirement Association supports reducing taxes on pass-through businesses, an unintended consequence of the pass-through proposals under consideration is that they undermine the incentives for these small business owners to sponsor a retirement plan for their workers,” Graff said in a statement.  “The impact on small businesses is a particular concern, since those who work for small businesses are significantly less likely to have access to a retirement plan at work than those who work for larger employers.”

However, the organization argues that there’s a simple solution to this problem: have the owner’s allocable retirement plan contribution be separately stated and applied solely against income that is taxed at ordinary rates.  However, thus far the legislation is being rushed through without addressing this critical issue.

“The security of Americans is a matter of economic and fiscal concern for the nation,” Graff concluded.  “Hard-working Americans need to stand up for their future, and tell Congress to leave their retirement alone.”

The ARA has launched a website for 401k plan professionals interested in assisting with its cause, which can be found at

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