William Byrnes' Tax, Wealth, and Risk Intelligence

William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘403(b)’

Will Trump Keep His Promise that No One’s Retirement Will Be Taken Away?

Posted by William Byrnes on November 16, 2017

The 2017 Tax Reform discussion originally was, like the 1986 discussion, about whether the Internal Revenue Code should be used for incentives and subsidy in favor of a particular activity or particular group of taxpayers. Broaden the base, lower the rates, simplify the variations, exceptions, and exemptions. But the dueling Chamber proposals are now out and tax reform based on equity and on eliminating tax-incentives was dead on arrival. It the same old ‘every interest’ vying for a portion of the pie. That’s the democratic, political “Gulchi Gulch” process. What is my interest then? I work for a public research university. I have ‘a dog in this fight’ described below. Hope that the government relations staff of NTEU, of state universities, and of other government employee stakeholder groups raise their voices like the Seraphim to the Republican members of the Finance Committee that are willing to listen.

So what’s so alarmed me to divert my attention to the retirement provisions of the Senate Chair’s mark? Did not the President state that retirement would be left alone (see his tweet here)?  Appears the Senate ignored him as usual.

The Senate Finance Committee Chair slipped in (at page 178) an explosive measure for government employees that also impacts public academic institutions. The Senate Finance Committee Tax Reform Chair’s Mark under the current status (November 9, 2017) will limit public employees to one aggregate amount of $18,500 for retirement plans 403(B) and 457 as of January 1, 2018.

Finance Committee Chair Proposal: The proposal applies a single aggregate limit to contributions for an employee in a governmental section 457(b) plan and elective deferrals for the same employee under a section 401(k) plan or a 403(b) plan of the same employer. Thus, the limit for governmental section 457(b) plans is coordinated with the limit for section 401(k) and 403(b) plans in the same manner as the limits are coordinated under present law for elective deferrals to section 401(k) and section 403(b) plans.

Government, including public educational institution, employees needs to become immediately aware that this provision will critically reduce their ability to contribute to their employer retirement plan(s) by $18,500 (or $24,500 for employees 50 years and older) as of January 1, 2018.  Thus, while there is still time to make December 1st contribution changes to preserve the last year of the additional $18,000 (or $24,000 if at least 50 years of age), these employees need to arrange with their payroll officers to contribute before December 31st any difference between what is allowed in 2017 and what has actually been contributed. As of January 1, 2018, the ability to contribute is gone forever.

Hatch Amendment #2 An amendment to the catch up contribution rules for section 401(k), 403(b) and 457)(b) retirement savings plans. Description of Amendment: This amendment would require all catch up contributions to section 401(k), 403(b) and 457(b) retirement savings plans to be Roth only, and increase the $6,000 catch up contribution annual limit applicable to such plans to $9,000.

See what he’s done here to Americans trying to save for retirement? At age 50 plus, we will pay on average – say 30 percent – for each catchup retirement dollar. How many years does it take to catchup with this 30 percent loss out the door? Based on historical annual average market returns, it will require four years to break even on the 30 percent loss. Only in year five will the 50-year-old, based on historical returns, start to earn towards retirement relative to her situation today in 2017. Where does our 30 percent loss out the door go? To pay for …. an energy credit? I don’t know. The revenue raised is relatively minuscule. The damage to retirement savings – tremendous.

Lack of Impact Analysis on Retirement and Public Employees

Curiously, I have not found many informative articles about the impact to retirement from these above-mentioned changes. Why is it silence from the public university crowd that is usually quite loud although this provision will damage their ability to attract researchers, faculty, and staff from the higher compensation opportunities of private educational institutions and for-profit industry?  Are we embarrassed to appear to be lobbying to keep a tax break? Just caught by surprise?  At least the NAGDCA has sent out an alert (Government Defined Contribution Administrators) to its members.

Instead of the beneficial retirement system, government agencies and public institutions need to find more revenue to pay competitive salaries and employee benefits to replace the loss of the retirement benefits (doubtful) Senate Finance will take away. Lacking better salaries, government agencies and public institutions will experience disproportionate employee turnover of the best performing management coupled with a declining ability to attract highly accomplished professionals and researchers to replace the pool.

Is this Payback Against the IRS?

Perhaps this provision is a Republican payback to government agencies like the IRS because Republicans think that the current government management pool is biased against Republican groups or lacks service for taxpayers? But taking out the best performing managers from government service will exasperate the challenges, not remediate them. If this is a ‘payback’, then it is “cutting off one’s nose”.  Perhaps the provision is but a Machiavellian move in a contest for talent between a state university and its private counterpart (Utah v BYU comes to mind)?

Maybe the silence from the government and public institutions employees is ‘heads in the sand’, and perhaps ‘those in the know’ think this provision will not survive because JCT scored it as only worth $100 million a year at least until 2021 (so why waste the political capital). Apportioned amongst all government employees in the US (being federal and state), state public academic institutions I suspect are less than 10 percent of this score, thus about $10 million a year for offset (inconsequential basically).

Can Public Institutions Be Saved?

A carve-out from this provision for public educational institutions would address the harmful issue and can be negotiated in response to the also proposed loss of the current carve-out for deferrals allowed for section 403(b) plan for at least 15 years of service to an educational organization, hospital, home health service agency, health and welfare service agency, and church. Seems to me that Republicans would prefer to incentivize via retirement doctors, nurses, social workers, and clergy to stay long-term in their public positions instead of paying higher government salaries.

Interested to learn the impact on your clients of the 2018 tax changes, and what to do about it?  Read the online version of Tax Facts.

Posted in Retirement Planning | Tagged: , , , | Leave a Comment »

%d bloggers like this: