Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Artificial Intelligence
    • Consultants
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Regulation
    • SECURE 2.0
    • Special Reports
    • Washington
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Influential Women in Institutional Investing 2023
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • 2023 ESG Investing Conference
    • ESG Rated ETFs
    • Divestment Database
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • DC Plan Design: Improving Participant Outcomes
    • 2023 Defined Contribution East Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
Breadcrumb
  1. Home
  2. Legislation
January 05, 2018 12:00 AM

Tax law's pass-through provision could harm 401(k) plans

Law creates a differential in tax rates that may lead business owners to shy away from sponsoring a retirement plan, or water down existing benefits

Greg Iacurci
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Bloomberg

    The new tax law's provision on pass-through businesses is proving to be one of the most challenging to dissect, and it's one that some retirement pundits are eyeing with concern.

    Some industry groups, such as the American Retirement Association, say the pass-through rules could become the most impactful part of the law for 401(k) plans, which were otherwise largely left untouched by the legislation.

    The alarm stems from a new tax mismatch created by the rules on pass-through entities, which observers contend could lead to a slowdown in new 401(k) plan creation among small-business owners and a watering down of benefits for participants in existing retirement plans.

    "We have concerns for both of those events," said Doug Fisher, director of retirement policy at the American Retirement Association.

    Pass-throughs are businesses such as limited liability companies, sole proprietorships, S corporations and partnerships whose income is passed to owners' tax returns, and taxed at their individual rate.

    The tax law, signed Dec. 22 by President Donald J. Trump, provides a 20% tax deduction to pass-throughs. So a pass-through business owner would be able to deduct 20% of income from what is taxed. Put another way, a top rate of 37% on taxable income would become 29.6% (or, 37% reduced by 20%).

    This lower rate provides a disincentive for small-business owners to stash pre-tax money in a 401(k) plan, observers argue. Their logic: Why save money in a 401(k) now and likely pay a higher rate later upon withdrawal, when the owner can pay a lower tax rate now?

    Mr. Fisher argues the tax differential will deter some business owners from starting a 401(k) plan, which could, in turn, hinder business development for retirement plan advisers. He and other observers also believe pass-through treatment could drive business owners to dilute benefits in existing plans.

    Some entities, especially S corporations, may be less incentivized to provide a generous company match if they can get a more economical tax break by counting that money as business income instead of a plan contribution, said Michael Hadley, partner at Davis & Harman, a firm that lobbies on behalf of financial services organizations.

    "I do have a concern," Mr. Hadley said. "I think the way the final bill came out, the concern was a lot less than it could have been."

    When the House of Representatives issued its version of the tax bill in November, the American Retirement Association estimated the pass-through provision would affect roughly 320,000 retirement plans and 24 million employees, Mr. Fisher said. The House's pass-through rules differed from the one in the new law, though, and the organization hasn't yet revised its estimate.

    Some are skeptical the pass-through rules will significantly affect 401(k) plan creation and benefits, saying business owners typically don't set up retirement plans primarily as a tax shelter.

    "Their belief is a business owner only sets up a 401(k) as a self-serving matter," said Aaron Pottichen, retirement services practice leader at CLS Partners, about groups alarmed with the new tax law. "In my dealing, they're setting up a 401(k) mostly because they want to provide a benefit for their employees."

    And there are a few limitations on which businesses can receive the 20% tax deduction. The owner of a service business whose income exceeds $207,000 wouldn't get the deduction, for example.

    Mr. Hadley also points out the deduction will vary widely based on a pass-through's business model, and that it may ultimately be more beneficial for some business owners to put money in a 401(k) now and let it grow tax-free, as opposed to getting a tax break now and saving in a taxable brokerage account.

    "The actual impact of it in the real world, I think, is still to be determined," Mr. Hadley said.

    Related Articles
    President Trump signs tax reform into law
    Tax cuts, bonds and the look ahead
    Tax reform deal has few answers, many questions
    Visa boosts match to apply to 5% of employee's pay
    Recommended for You
    Cory_Booker_i.jpg
    Sen. Booker introduces bill to restrict corporate control of farmland
    Ralph_Norman_i.jpg
    House Republicans introduce more anti-ESG measures
    DC Plan Design: Improving Participant Outcomes
    Sponsored Content: DC Plan Design: Improving Participant Outcomes
    Sponsored
    White Papers
    Exploring the Commercial Application of Artificial Intelligence
    Conflict Minerals: The human cost of our electronics
    Research for Institutional Money Management
    Private real estate entry points emerging amid selloff
    2023 Hot Topics in Retirement and Financial Wellbeing
    Bonds: Shaken, but Not Stirred
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Custom Content
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Artificial Intelligence
      • Consultants
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Regulation
      • SECURE 2.0
      • Special Reports
      • Washington
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Influential Women in Institutional Investing 2023
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • 2023 ESG Investing Conference
      • ESG Rated ETFs
      • Divestment Database
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • DC Plan Design: Improving Participant Outcomes
      • 2023 Defined Contribution East Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars