Senate Republicans "may be considering" tapping 401(k) deferrals in the version of a tax reform bill scheduled for release on Thursday, according to a statement on Democratic Senator Patrick Leahy's website.
Leahy and 15 other Senate Democrats sent a letter to the leadership of the Senate Finance Committee, saying any reform that would eliminate or "drastically limit" the deductions for contributions to 401(k) plans is "unacceptable."
The House GOP bill being marked up this week did not include lower caps on pre-tax income that can be deferred to retirement savings plans. Lawmakers on the Ways and Means Committee had reportedly been considering capping pre-tax deferrals at $2,400.
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But new analysis of the Tax Cuts and Jobs Act shows tax writers may have to tap more expenditures in the tax code if Republicans intend to pass a bill without support from Democrats.
The House version of TCJA will not comply with the so-called Byrd rule in the Senate, which will require the law to be deficit-neutral after 10 years. According to the Committee for a Responsible Federal Budget, the bill would add $155 billion to the deficit in 2028, the year after the 10-year budget window ends in 2027.
And the Congressional Budget Office has estimated that the House bill will add $1.7 trillion in new deficits within the 10-year budget window. Budget resolutions passed in the House and Senate only allow for $1.5 trillion in new short-term deficits.
Room for negotiation?
Capping pre-tax deferrals to 401(k) plans at $2,400, as was reportedly under consideration prior to the release of the TCJA, was an aggressive departure from previous proposals advanced by Republicans.
A 2014 GOP tax bill would have capped pre-tax deferrals at half of the statutory limit for 401(k) contributions, or $9,000 in 2017.
An aide to Sen. Leahy did not specify whether the lawmaker from Vermont has seen the Senate Republican bill, or whether Senate Democrats would accept new caps on deferrals that only affect wealthier savers.
"The question is less about whether Democrats are willing to negotiate and more about the Republicans being unwilling to give Democrats a seat at the table to even have those conversations," the aide to Sen. Leahy said.
"This has been a bad process and changes to retirement tax benefits are only being proposed to pay for the cost of giving massive tax cuts to the wealthy and to large corporations," the aide added.
The most recent numbers from the Treasury Department show pre-tax contributions to traditional 401(k)s account for a $1 trillion tax expenditure between 2018 and 2027.
A cap on pre-tax contributions would allow tax writers to count new revenue to offset tax cuts within the 10-year budget window.
But doing so would also take tax revenue off the books outside the 10-year budget window, raising the question as to whether the so-called Rothification of retirement assets could be used in the Senate, where the Byrd rule will come into play if Republicans hope the fast track a bill on a party-line vote.
An inquiry to Sen. Orin Hatch, R-UT, chair of the Senate Finance Committee, was not returned before press time.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
