Summary of Proposed Tax Reform Legislation

With the introduction of the 2017 tax reform bill, there has been a lot of speculation and analysis of what is – and what isn’t – impacted by the proposed bill with respect to employee retirement benefit programs.

It is widely anticipated that the initial provisions of this bill may change as the legislation goes through the committee review and comment period. The following is NRECA’s interpretation of the bill in its current state as it pertains to retirement benefit programs.

401(k) contributions
The proposed bill makes no changes to current 401(k) plan limits or deferral types. However, there is language that would potentially impact hardship withdrawals, loans and rollovers from 401(k) accounts to IRAs.

• Employees having taken hardship withdrawals from their 401(k) accounts would no longer be temporarily restricted from making contributions to their accounts. Additionally, the proposed legislation would expand income sources from which to take a hardship withdrawal to now include account earnings and employer contributions.
• The rule allowing re-characterization of IRA contributions and conversions from traditional IRAs to Roth IRAs (and vice versa) would be repealed.
• Employees who separate from service with outstanding 401(k) loans would have until the due date for filing that year’s tax return to contribute the outstanding loan balance to an IRA in order to avoid having the loan taxed as a distribution.

For full information, please read Title I, Subtitle F (Sec.1501, 1503, 1504 and 1505).

Defined benefit pension plans
Co-ops offering a defined benefit plan, such as the Retirement Security (RS) Plan, who have “closed” their plans to new employees (but continue to provide benefits for employees in the plan before the close date) will benefit from Sec. 1506. This section of the bill addresses “non-discrimination” rules that would eventually force the co-op to close their plans completely for all employees because long-term employees in the plan are paid more than new employees being hired.

• The proposed legislation would expand nondiscrimination testing across both defined benefit and defined contribution plans (if offered by the employer).

For full information, please read Title I, Subtitle F (Sec. 1506).

Nonqualified deferred compensation
Under current law, the general rule for employees of tax-exempt organizations is that they are taxed on their nonqualified deferred compensation as soon as they are vested in that compensation. But there is an exemption from that rule for annual deferred compensation up to $18,000. Even if the employee is vested in $18,000 in deferrals, that employee is not taxed on the deferral until it’s paid to them. The bill repeals that $18,000 exemption – all deferred compensation would become taxable when vested. The proposed bill would eliminate 457(b) arrangements for tax-exempt organizations and apply 457(f) rules to everyone. Additional interpretations of the bill’s language indicates that employees with 457(b) deferrals and earnings would have those moneys taxed once vested, but no later than 2025.

Additionally, the limitation on excessive employee remuneration is modified as well as the excise tax on excess tax-exempt organization executive compensation. For full information, please read Title III, Subtitle I (Sec. 3801 – 3803).

Proposed bill is available online
You may read the bill in its entirety or the “section by section” summary on the U.S. House of Representatives’ website. If you have questions about the proposed bill and its relevance to your co-op’s benefit programs, please contact your field representative. NRECA staff will continue to monitor the changes resulting from the Congressional review period and will issue updates as appropriate. Additionally, NRECA staff will continue to represent the best interests of America’s Electric Co-ops on Capitol Hill.