The reconciliation of the tax reform bills working their way through Congress is prompting retirement industry experts to speak up. Many are expressing concern that the unintended consequence of the some of the proposed changes would create a disincentive for some business to offer or maintain 401(k) plans for their employees.
DWC partner and consultant Adam Pozek offered some insight into the matter when he spoke to BenefitsPRO’s Nick Thornton.
“The ‘hyper-technical’ implications for S-Corp owners, and some LLC owners that elect to file as S-Corps, come down to how small businesses deduct plan contributions, according to Pozek,” writes Thornton.
Both the House and Senate versions of tax reform would reduce the tax rate that applies to business profits of so-called “pass-through” entities like subchapter S corporations. Since retirement plan contributions are deducted against business profits, the reduced tax rate would make that deduction less valuable to S-corp owners.
Because benefits are ultimately taxed as ordinary income when distributed at retirement, S-corp owners would be taxed at a rate that is higher than the original deduction. This confluence of factors could cause S-corp owners to reconsider the value of offering a retirement plan at all.
Studies have shown that employees are 15 times more likely to save when they are covered by a workplace retirement plan, so any change that discourages companies from offering these plans is detrimental to the overall financial health of American workers.
Several retirement plan advocacy organizations are working with congressional staff to come up with a fix that would allow S-corp owners to preserve the retirement plan incentive by allowing retirement plan contributions to continue to be deducted against the higher earned income rates, similar to how partnerships operate.
To learn more about Pozek’s opinion on the tax bill, click here to read Thornton's article.