Much has been written about changes the recent Tax Cuts and Jobs Act (the “Act”) will make to the world of employee benefits and executive compensation.  Rather than copy what is already out there, I thought it appropriate to comment on a few areas at this time.

401(k) Plans

There was concern that the Act in its final form would change the 401(k) system as we know it by eliminating the ability to make before-tax contributions.  While this did not happen, it would have been a substantial revenue raiser, and I would not be surprised to see the concept resurface in the future.

Be that as it may, the Act makes one 401(k) plan-related change by allowing a terminating employee to defer a deemed distribution of an outstanding loan amount until the day that employee’s tax return is due for the year of distribution.  This allows the terminating employee some extra time to transfer the amount of the unpaid loan to the plan or IRA to which the former employee rolled over the remaining account balance and avoid the income tax and potential penalty that would otherwise become due.

A plan sponsor should ensure that its loan policy and plan documents either can be read to support this new provision or it should make the necessary changes.  This provision is effective for plan distributions occurring on and after January 1, 2018.

 Roth and the Qualified Business Income Deduction

One of the conventional reasons why one would want to choose to make retirement contributions on an after-tax basis is an anticipation that come distribution time, the participant’s tax rate will be higher.  Back in the day when people seemed concerned about budget deficits (this wasn’t very long ago), there was a group who thought that at some point, tax rates would have to increase to accommodate the debt.  This concern led some to choose Roth or other after-tax contributions in order to beat any future increase.

The Act’s new pass-through business income deduction will allow eligible business owners to significantly reduce their effective tax rates by deducting up to 20% of their business income.  This new deduction may make Roth or other after tax contributions more attractive by making it more likely that the income tax rate a business owner is subject to in retirement will be greater than the rate that owner is subject to at the present.  This sounds like a good topic to address with the tax advisor this season.  The new deduction went into effect for tax years beginning after December 31, 2017.

 Repeal of the Individual Mandate

The Act repealed the Affordable Care Act individual medical coverage mandate beginning in 2019.  Note that the mandate still applies in 2018.  Also note that the coverage mandate still applies to larger employers.  Regardless, beginning in 2019, the mandate repeal will give individuals more flexibility as to the coverage, if any, they will choose.  The hope is that this will provide small business owners and those who purchase coverage on the individual market with cheaper alternatives than those available through the exchanges or even some employers.  A recent Executive Order and Department of Labor guidance is intended to facilitate this type of innovation by encouraging association type plans and the ability to purchase coverage across state lines.  The former will provide individuals and small businesses with large employer purchasing power.  The latter will allow the purchase of insurance without having to pay for undesired state-mandated coverages.

In a perfect world this innovation will provide small businesses and individuals who don’t quite fit into the present system with the ability to save money while minimizing disruption to the existing system.  Legislative adjustments are likely necessary.  I hope the policymakers can put politics aside, understand the problem at hand and work together to ensure that all interests are protected to the extent feasible.