Individual business owners, however, would see their personal income taxed at a top marginal income tax rate of 35 percent (though the framework leaves open the possibility that an even higher tax rate would be established for the wealthiest taxpayers).

Because income drawn from a traditional retirement account is contributed on a pre-tax basis and is taxed at the account owner’s ordinary income tax rate when it is withdrawn, that income could potentially be taxed at a rate that is 10 percent higher than the rate that would apply if the income were taxed currently as pass-through income.

Further, capital gains tax rates are not included in the framework, so the maximum capital gains rate would presumably remain at 20 percent—meaning that earnings on pass-through income that is invested in taxable investments would also be taxed at a much lower rate.

For small business owners in the highest income tax bracket, this could create a powerful tax incentive to stop offering retirement savings options (which can also subject these business owners to fiduciary liability and administrative costs) and simply plan for their own retirements by using taxable investments.

This tax dichotomy has the potential to create a wide-reaching disincentive to retirement savings, especially because an estimated 90 percent of businesses are organized using a pass-through structure.

Motivations to maintain retirement planning status quo

While the proposed changes in the tax rate structure could persuade some small business owners to cease offering traditional retirement savings options to employees, many business owners may be inclined to keep these options even if the framework tax rate structure is adopted in its current form.

First, while many small business owners’ retirement plan distributions may be subject to the personal 35 percent income tax rate in the future, others may anticipate falling into a much lower income tax bracket during retirement (it is the tax rate that applies when the distributions are actually taken that is relevant).

Secondly, many employees who contribute pre-tax dollars to their own accounts may be in much lower income tax brackets, so that the retirement plan option can provide a powerful benefit for attracting and retaining employees.

Other small business owners might recognize that, for lower income employees, the employer-sponsored retirement savings option might be the only way that these employees are going to save for retirement.

Recognizing that providing employees with a retirement savings option can promote loyalty and reduce the costs associated with employee turnover can give owners a financial incentive to maintain these plans.

Expect negotiation

It is important to note that the framework proposal is just that—a skeletal outline addressing the broad strokes of what tax reform could look like.

Advisors and clients should expect much negotiation before final legislation emerges, meaning that it is entirely possible that comprehensive legislation will specifically address the retirement planning issues caused by the framework.