The “hyper-technical” implications for S-Corp owners, and some LLC owners that elect to file as S-Corps, comes down to how small businesses deduct plan contributions, according to Pozek.

“In partnerships or sole proprietorships, plan contributions are deducted against earned income, or the individual tax rate of business owners,” explained Pozek.

“But for S-Corps, the deduction is taken at the corporate level, and applied against what will be a lower pass-through rate,” he added. “So they will be deducting plan contributions at a lower rate, but taxed on the savings in retirement at a higher ordinary income rate.”

Some fear the upshot will be S-Corp owners terminating 401(k) plans, and instead directing personal income to non-qualified investments, which would be taxed at the capital gains rate in retirement, or at a substantially lower rate than the highest ordinary income rates.

“Under the reform bills, business owners can generally realize greater economic value by simply paying taxes now and investing retirement contributions outside the plan,” said Pozek.

“If that is the case, why incur the expense and compliance responsibility of maintaining a plan at all?” he added.

More generous ‘new comparability’ plans may fall victim

According to the IRS, there were more than 4.6 million S-Corporation owners in the U.S. in 2014, compared to 1.7 million C-Corporations. There are now more than 1 million LLCs.

Pozek does not see the threat to S-Corp retirement plan sponsorship as existential. “I think we would see some drop off, but not a wholesale termination of plans.”

But that doesn’t mean the implications for rank-and-file employees of S-Corps won’t be real under the new pass-through structure.

In order for business owners to maximize retirement plan deferrals—the legal max was $60,000 in 2017—S-Corp sponsors often set up “new comparability” 401(k) plans.

Under that design, sponsors can distribute larger plan contributions to older and higher wage participants.

In order for those plans to satisfy IRS and ERISA non-discrimination rules, lower-wage rank-and-file participants must also benefit from higher employer contributions.

For owners to maximize their own deferrals under a new comparability plan, company profits must be distributed to all employees at the lesser of one-third the highest contribution rate of owners, or 5 percent of an employee’s compensation.

Unlike other employer match structures, the 5 percent profit distribution to rank-and-file employees must be made even when employees don’t elect to make their own contributions.

S-Corps that can afford the plans benefit from maximizing owner tax deferrals, getting older workers higher contributions in the pre-retirement years, while assuring younger workers are saving at rates that often outpace standard 401(k) offerings.

Pozek says about half of DWC’s S-Corp clients have a comparability plan in place. “It’s definitely not an unusual structure.”

New pass-through rates will lead to reduced employer contributions

Eric Droblyen, CEO of Employee Fiduciary, a Florida-based consultancy that customizes retirement plans for small and midsized businesses, also doubts the new pass-through rates will lead to widespread plan termination.

“Will a small minority terminate plans? It’s conceivable. But business owners’ personal tax reasons are not the key reason why they sponsor plans,” Droblyen told BenefitsPRO.

He--and others--cite a study by Pew Charitable Trusts, which showed that only 5 percent of small business owners said the primary reason they sponsor retirement plans was to shelter their own savings. Attracting the best employees and helping them prepare for retirement were far more common reasons for sponsoring retirement plans.

The real impact small business tax reform will have on retirement plans will be seen in plan design, and on more “exotic” offerings like new comparability plans, says Droblyen.

Beyond the higher overall contribution rates required in new comparability plans, sponsors also pay a premium for the specialized expertise required to design and administer the plans, which have to be cross-tested against a specific group’s demographics, sometimes annually.

Instead of adopting plans that maximize contributions as efficiently as possible, Droblyen sees sponsors opting for more commoditized plan offerings.

That may end up hurting the average participant in an S-Corp plan--even more so than business owners.

“Rank-and-file savers really do benefit from more generous benefits in new comparability plans,” said Droblyen, who said a study of the plans administered by Employee Fiduciary shows high rates of the profit-sharing plan model.

Moreover, the adoption of defined benefit plans among small businesses—a trend Droblyen says is on the rise—will also be impacted. “Those will get crushed under tax reform,” he said.

While there is little doubt that lower pass-through rates will make pre-tax retirement contributions less attractive for S-Corp owners, it won’t be a death knell for small business plan adoption.

“I think the change will be worse for retirement plan industry profits than small business 401(k) plan sponsorship,” said Droblyen. “Why would an employer pay more for plan design expertise if it won't deliver tax savings? “