401(k) Industry Walks Tightrope in Congress to Protect Tax Break

Industry advocates promoting legislation in 2025 allowing public school teachers and nonprofit workers to use low-cost collective investment trusts for retirement are taking pains to avoid losing 401(k) tax incentives for workers in the process.

The retirement industry is making this expansion of the use of 403(b) plans through CITs a top legislative priority in Congress, according to advocates, after the goal was left out of two previous landmark federal retirement laws and the last government spending bill.

Yet timing is an issue, as some worry that a push around 403(b)s in 2025 will draw more attention to the employer-sponsored retirement system just as Congress gears up to negotiate an extension to the Trump-era tax cuts. While the tax savings workers enjoy in their nest eggs are unlikely to be eliminated entirely, lawmakers eager to pay for the cuts they make elsewhere in the Internal Revenue Code could chip away at workers’ incentives.

Two massive retirement packages, SECURE 1.0 and 2.0 Acts, passed respectively in 2019 and 2022, opened up opportunities for more employees to start saving for retirement at work and paved the way for Wall Street firms to manage the new cash flows. Talk has already begun about a successor bill.

“There is an appetite for SECURE 3.0,” said Brad Campbell, a partner at Faegre Drinker Biddle & Reath LLP and former top US Labor Department benefit plan regulator under President George W. Bush. “The fact that there is going to be a major tax bill in 2025 is both a good thing and a bad thing for SECURE 3.0.”

SECURE 3.0

The SECURE 2.0 Act left out relevant language for financial services companies to market CITs to 403(b) tax-sheltered annuity plans covering public school teachers and nonprofit workers.

CITs are cheaper investment alternatives available to most 401(k) plans, but Congressional Democrats and the House Financial Services Committee were concerned that they aren’t regulated by the US Labor Department and don’t afford workers protections under the Employee Retirement Income Security Act of 1974.

Industry groups fought hard to include the 403(b) plan fix in the latest short-term funding bill Congress passed, but last-minute partisan squabbling nixed the measure.

“We’ll have to gear up quickly to get a new strategy next year,” said Will Hansen, chief governmental affairs officer for the American Retirement Association.

Those kinds of SECURE 2.0 fixes are all the retirement industry wants to hope for in 2025, rather than a major legislative 3.0 overhaul, Hansen said.

But the framework for a broader bill is taking shape regardless. Workplace-sponsored plan advocates want to counter a measure introduced last year that would stand up a government-sponsored individual retirement account plan.

A federal plan would compete with the private-sector system, so the ARA and other groups like it instead favor an automatic IRA bill that Rep. Richard Neal (D-Mass.) introduces yearly that would still require most employers to sponsor a basic plan.

“Anything sponsored by the federal government would be an extremely expensive bill to pass and cause a lot of small businesses to shutter their 401(k) plans,” said Nathan Glassey, ARA’s director of federal and state legislative affairs.

Tax Expenditures

Provisions of the 2017 Tax Cuts & Jobs Act set to expire at the end of this year will be taken up by Congress through the fast-track budget reconciliation process, which can pass the Senate by a simple majority and avoid the risk of a filibuster in the closely divided chamber.

Reconciliation bills are a logical vehicle for pro-retirement legislation that encourage saving by offering tax breaks, said Campbell. Lawmakers negotiating an extension to Trump’s 2017 income tax breaks, however, will be looking to pay for existing concessions rather than making additional ones.

Combined individual defined-contribution 401(k)-style plans and large corporate pensions make up by far the largest annual federal government tax expenditures, said Paul Richman, chief government and political affairs officer for the Insured Retirement Institute. The IRS passes over plans for payroll and income taxes on contributions and doles out credits to businesses that start plans and workers who participate in them.

In fiscal year 2024, retirement plans alone cost the federal government nearly $400 billion in tax revenue, roughly 25% more than the next highest tax expenditure, according to the Bipartisan Policy Center.

“It’s the biggest encouragement that the federal government offers to workers to contribute in retirement savings, and our main focus as an industry will be to ensure that we preserve it,” Richman said.

Close Call

Americans almost took a hit to their 401(k)s in the lead-up to the 2017 tax cuts. Some early iterations of the legislation would have converted nearly all of workers contributions to post-tax Roth accounts, taxing retirement savings at the start of a worker’s career, rather than the end.

Those proposals came to an abrupt halt when former President Trump voiced his displeasure: “There will be NO change to your 401(k),” he posted on X social media platform. “This has always been a great and popular middle class tax break that works, and it stays!”

It’s a good sign that the current president-elect had axed the idea, but not that it came up in the first place, said Richman.

Before the SECURE 2.0 Act was passed, Democratic lawmakers considered another pay-for strategy to eliminate the so-called mega backdoor Roth, which allowed people who made too much money to contribute to a Roth plan to do so by converting IRA or 401(k) dollars. The plan was abandoned.

“The question is, are we looking for coins in the couch or are we looking to raid the piggy bank?” said Jason Bortz, senior vice president and senior counsel at Capital Group, the investment manager to American Funds.