At first glance, the Tax Cut and Jobs Act (TCJA) did not change much regarding retirement plans. None of the rumored changes were included in the TCJA, such as the so-called rothification. Moreover, there were no changes to retirement plan limits or rules regarding contributions. Well admittedly, the TCJA did change a few things.
The TCJA extended the time a separated participant has to pay back their plan loan by ultimately rolling it over to an IRA. Separated participants now have until up until the filing of their tax return including extensions to pay back their loan by depositing the principal balance plus interest owed to an IRA.
The TCJA also included disaster relief on plan distributions for hurricane-affected areas. Retirement plans that did provide this relief will ultimately need amending. The TCJA allows these plan sponsors to amend their plan retroactively. The amendment deadline is December 31, 2018.
As you have just read, these are rather minor changes made to qualified retirement plans. You might even say the TCJA’s impact to retirement plans appears to be negligible. Right? Well, maybe.
Changes in the Making
In the short time since the TCJA has passed, there has been flurry of news about organizations using their cash windfalls from repatriated cash and making commitments to use anticipated cash savings from tax rate cuts. There has been quite a bit of news about several salary increases, many one-time bonuses, some increased 401(k) employer matches and sizeable pension plan contributions. It is remarkable how quickly organizations reacted to the TCJA. Assuredly, there will be many, many more such news items to come throughout 2018.
This is great news for retirement plans. Salary increases and one-time bonuses turn into more retirement savings due to employee deferrals from those amounts. Increased employer matches also help to booster those retirement savings. It behooves employees to take advantage of increased matches, by increasing deferrals sufficiently to take full advantage of higher matches.
Employer contributions to pensions help to restore pension funding to manageable levels. Pension eligible employees of those organizations and the Pension Benefit Guarantee Corporation (PBGC) may now temporarily breathe a sigh of relief that their benefits are more secure and less likely to end up at the PBGC.
For the organizations that acted quickly, they probably were already contemplating compensation changes and significant pension contributions, especially those with underfunded pensions, before TCJA passed into law. For the rest, there is no better time than now to review their retirement plans under the TCJA.
With new tax rates at levels we may never see again, it may be a good time for plan sponsors to take a fresh look at their plan designs. Start by asking if your plan is effective at promoting retirement savings and helpful in keeping and attracting skilled talent. In particular, sponsors of 401(k) plans might review the success of their plan features by looking at their employee participation and savings rates.
Best practices that promote 401(k) plan savings are designs that include features of automatic enrollment and auto-escalation. Review your plan’s offerings of these features and their effectiveness. It may be time to either start or increase your default savings rate. If your 401(k) does not allow Roth contributions, now would be a great time to consider adding this feature or increasing its effectiveness through auto-escalation, for example. With overall lower tax rates, more employees may find it more appealing to save through Roth contributions.
You might also review your plan eligibility rules. Do they encourage your employees to start saving as soon as possible? Many 401(k) plan designs do not allow employees to begin participating until completion of a year of service and reaching the semi-annual plan entry date. A great way to get employee savings started early is to allow them to be eligible to participate immediately upon hire. Employees may be more willing to start building their savings sooner from cash savings under the TCJA, plus it helps plan sponsors keep and attract skilled talent.
Another way to help attract and retain your employees while encouraging them to save is to provide an attractive matching contribution. Compare your employer contribution and/or match to other organizations in your industry and assess whether or not it is attractive to your workforce and prospective employees. Consider increasing your match in a way that meets your financial objectives and cash flow needs from the TCJA tax savings. For instance, increase your match and concurrently broaden employee deferrals matched under the new formula.
No Better Time Than Now
Ultimately, the TCJA’s impact on your retirement plan will be much wider than what we see on the surface. Highlighted here are some of the best practices in 401(k) design to help promote more retirement savings under the TCJA. In addition, plan sponsors should review other retirement plan designs and features, such as withdrawals, investments and employee education. There is no better time than now to take a meaningful look at all your retirement plans.
For more information on retirement plan designs under TCJA, contact Larry Ruff at [email protected] or call him at 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Services.