Pushing for Tax Reform – Retirement Plans

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The American Institute of Certified Public Accountants (AICPA) has participated in U.S. House of Representatives, Committee on Small Business hearings on tax reform with the goal of ensuring that main street isn’t left behind. One area of focus in this regard has to do with retirement plans. Small businesses are especially burdened by the overwhelming number of rules inherent in adopting and operating a “qualified retirement plan”.

The AICPA has been encouraging congress to consider a number of measures to simplify the operation of retirement plans. For instance, currently there are four employee contributory deferral plans: 401(k), 403(b), 457(b), and SIMPLE plans (which, by the way, aren’t always that simple). The AICPA is pushing for the creation of a uniform type plan to replace these.

Another proposal is to eliminate certain nondiscrimination tests on employee pre-tax and Roth deferrals for 401(k) plans matching contributions, as they may artificially restrict the amount higher-paid employees are entitled to save for retirement by creating limits based on the amount deferred by lower-paid employees in the same plan. Although the 403(b) plan is of a similar design, there is no comparable test on deferrals for this type of plan.

Eliminating “Top Heavy Rules” would also simplify things because they constrain the adoption of 401(k) and other qualified retirement plans by small employers. Determining the status can be difficult and the required 3% minimum contribution is often made for safe harbor 401(k) plans as a result. Without these rules, the AICPA contends more small businesses would adopt plans to benefit their employees.

By Dale F. Jensen, CPA