PLANADVISER - January/February 2018 - 13

Tax Act May Affect Retirement Plans
ESOPs, NQDCs and IRAs, plus 529 college plans, could feel the impact
THE Tax Cuts and Job Act does not
change legislation for employee stock
ownership plans (ESOPs), but it could
have some indirect effect in regard to
how they are taxed, according to an
" Employee Ownership Update, " written
by Loren Rogers, executive director
of the National Center for Employee
Ownership.
The tax bill limits net
interest
deductions for business to 30% of
earnings before interest, taxes, depreciation
and amortization (EBITDA) for
four years, but, starting in 2022, it will
exclude deductions on earnings before
depreciation and amortization. Or in
other words, Rogers says, " businesses
will subtract depreciation and amortization
from their earnings before
calculating their maximum deductible
interest payments. "
New leveraged ESOPs that borrow a
large amount relative to their EBITDA,
Rogers says, " may find that their
deductible expenses will be lower, and,
therefore, their taxable income may be
higher under this change. " However,
100% ESOP-owned corporations will
not be affected because they pay no
tax, he says.
" Many questions remain [as to] the
impact of this change, " Rogers says.
" Importantly, it is not yet clear whether
the limit on deductibility of interest will
apply to loans made after the bill goes
into effect or if it will apply retroactively.
It is also unclear what impact the
bill will have on alternative structures
such as replacing simple interest with
warrants or payment-in-kind interest. "
The tax act does not fundamentally
change the tax breaks retirement plan
participants receive, according to a law
alert issued by The Wagner Law Group.
Yet, it does make some changes
Employee
to
Retirement
Income
Security Act (ERISA) plans, including
nonqualified deferred compensation
(NQDC) plans and 529 college savings
plans. The act will continue to allow
taxpayers to recharacterize contributions
made to a Roth individual retirement
account (IRA) as contributions
to a traditional IRA, as long as this is
done before the due date of the taxpayer's
income tax return, including any
extension. Importantly, this will not
apply to the reverse situation, where
an investor would take traditional IRA
contributions and then recharacterize
them as Roth.
Currently, if an employee has taken
a loan from his retirement plan and
has an outstanding balance on termination
from his job, he has up to 60
days to roll over the outstanding loan
balance to an IRA to avoid having
the loans treated as taxable distributions.
The tax bill extends this rollover
period to the due date for filing one's
tax return.
With respect to nonqualified
deferred compensation (NQDC) plans,
the bill modifies the definition of a
" covered employee " at a publicly traded
company. A covered employee includes
the CEO and the chief financial officer
(CFO), as well as the next three highly
compensated employees, during the
tax year.
College savings plans are now
amended to permit 529 account owners
to take a $10,000 distribution each year
and apply it not just to college expenses
but also to public, private or religious
elementary or secondary schools.
-Lee Barney
Bob Doll Is Optimistic
Nuveen's senior portfolio manager's 10 predictions
GIVING his annual 10 macroeconomic
predictions for the new year ahead,
Bob Doll, senior portfolio manager and
chief equity strategist at Nuveen Asset
Management, remains bullish.
Doll's first prediction for 2018 is that
U.S. real gross domestic product (GDP)
growth will reach 3% and nominal GDP
will reach 5% for the first time in over
a decade. His second prediction is that
global expansion will continue, with
the fewest countries now in recession
in history. Third, Doll predicted unemployment
will fall to the lowest level in
nearly 50 years-below 4%-as wage
growth is the highest since the Great
Recession. Fourth, he projected the
yield curve will flatten but not invert, as
he expects the 10-year Treasury yield to
reach 3% for the first time since 2014.
Doll's fifth prediction is that stocks
will keep growing and this year surpass
the previous longest bull market. Tied
to this, he said, eventually the market
could face at least a 5% correction after
the longest period without one. " While
we expect the bull market to continue
and become the longest in history, we
also expect the uninterrupted strings
of advances to fade and occasional
pullbacks as interest rates and inflation
rise, " Doll said.
Sixth, he said, U.S. equity returns
will lag earnings growth for the first
time in six years, ending the longest
streak in decades. Seventh, equities
will beat bonds for the seventh consecutive
year-for the first time in nearly
a century. Eighth, corporate capital
expenditures will increase at the
expense of share buybacks. Ninth, telecommunication
services, information
technology and health care will outperform
utilities, energy and materials.
Doll expects Republicans to lose
the House, retain the Senate, " and
further distance themselves from the
president. " -John Manganaro
planadviser.com january-february 2018 | 13
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PLANADVISER - January/February 2018

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