The news that the Senate version of the tax bill would not touch 401(k)s was welcomed across the retirement services industry. (Photo: Shutterstock)

The tax treatment of contributions to retirement savings plans has been left unchanged in the Senate mark-up of a tax reform bill, according to a document from the Senate Finance Committee.

Senate lawmakers had been considering limiting the pre-tax contributions allowed in 401(k)s and IRAs to help offset the cost of lower corporate and individual tax rates.

The Senate version of tax reform will eliminate all deductions on state and local taxes, going further than the House version of the Tax Cuts and Jobs Act that passed out of the Ways and Means Committee today.

House Republicans from New York, New Jersey, California, and Illinois—high tax states that will be most impacted by removing the SALT deductions—were able to negotiate to preserve a deduction of up to $10,000 on property taxes.

But the Senate version does away with that deduction, setting the table for a potential impasse when the two chambers ultimately reconcile the two versions of the TCJA.

“Clearly they choose to go after state and local taxes and not 401(k)s,” said Will Hansen, senior vice president for retirement policy at the ERISA Industry Committee, which advocates for the interests of large plan sponsors.

Prior to the news from the Senate, Hansen said he was “50/50” on the prospect of whether lawmakers in the upper chamber would cap 401(k) deferrals.

Other advocates had confirmed on background to BenefitsPRO that the tax preferences on retirement plans were being considered as a pay-for in the Senate, in spite of the intense blowback from the White House, economists, and retirement industry advocates when it was first reported that tax writers in the House were considering limiting pre-tax contributions to 401(k) plans.

The news from the Senate was welcomed across the retirement services industry. But Hansen cautioned that “we’re not out of the woods yet.”

“They need revenue,” Hansen said of the tax writing process. “And they have to decide on what they can get done politically. They made the correct political decision. It would be harder to get tax reform across the finish line if they touched 401(k)s again.”

On the Ways and Means Committee, the question of the SALT deductions was the source of intense debate throughout the week as members marked up the House version of tax reform.

Several House Republicans from states that would be most impacted have signaled reluctance to vote for a bill that eliminates deductions of state and local taxes.

Rep. Darrell Issa, R-CA, one of 14 GOP members in the House from California, has said he won’t support the reform bill that will be brought to a full House vote as early as next week.

Last month, 20 House Republicans voted against a budget resolution that paved the way for tax reform to pass the Senate with a simple majority.

The Senate bill preserves other individual deductions that were cut in the House. It delays permanently lowering the corporate tax rate to 20 percent by one year, a tactic used to make the Senate version comply with the $1.5 trillion in tax cuts allowed within the 10-year budget window.

Ultimately, the Senate bill cannot increase deficits outside the 10-year budget window if it is to pass through the budget reconciliation process, requiring only 51 votes.

The dynamic of the SALT deductions, and the ultimate cost of tax cuts, could bring 401(k) plans back into play.

Hansen remains cautiously optimistic as tax reform moves forward.

“We’ll continue to educate and advocate for the preservation of 401(k) plans and the importance of pre-tax deferrals on increasing retirement savings,” he said.