With U.S. tax reform on the horizon, there are some reports that lawmakers are considering limiting annual pretax contribution limits to 401(k) plans to $2,400. The current tax code allows most workers to contribute up to $18,000 on a pretax basis to 401(k) plans. At this time, it is uncertain whether there will be any changes proposed.
On Monday, October 23rd, President Trump tweeted: “There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!” Then, on Wednesday, October 25th, President Trump told reporters: “Maybe we’ll use it as negotiating but trust me … there are certain kinds of deals you don’t want to negotiate with”.
If there is a change to drastically reduce the amounts employees can contribute pretax to 401(k) plans, employers may look to other types of retirement plans in order to satisfy their employee retirement plan needs. For example, some employers may look to make contributions to a profit sharing plan instead of an employee bonus or salary increase. Also, employers may start looking to nonqualified deferred compensation retirement plans that allow employees to contribute above the pretax limits imposed by the Internal Revenue Code. We will continue to monitor this and other tax reform developments.