Could Trump seek revenue via a sharp cut in 401(k) contribution limits?

The Trump administration’s first month has seen it take a sledgehammer approach to much of the federal government to save and find revenue. Could officials take the same bold approach to retirement accounts?

Tax cuts remain Trump’s centerpiece issue. Trump’s legislative agenda calls for at least $1.5 trillion in spending cuts over 10 years to help fund comprehensive tax reductions.

Lawmakers are hunting Medicaid for steep cuts. But could they also revive a 2017 plan to sharply reduce the amount of income American workers can save in tax-deferred retirement accounts? It makes some sense, said Brad Campbell, partner at the law firm Faegre Drinker Biddle & Reath.

The No. 1 source of untaxed benefits is health benefits. Retirement benefits are No. 2, he noted.

“We’re where the money is when it comes to trying to cut some of these deals,” noted Campbell, former assistant secretary of labor under President George W. Bush. “So that does raise concerns and risks.”

The Republican proposals floated in late 2017 included lowering the cap on the annual pretax amount workers can set aside to as low as $2,400 for 401(k) accounts. At that time, workers could put up to $18,000 a year in 401(k) accounts without paying taxes upfront.

Today, workers can put up to $23,000 in 401(k) accounts before taxes start, or $30,500 for anyone age 50 or older. Changing the cap merely speeds up the timing of the tax collection. Americans eventually pay taxes on pretax 401(k) contributions when that money is withdrawn.

Campbell correctly recalled that Democrats pounced on the GOP proposal, and it did not survive for long as a realistic option. Trump quickly rejected it as well.

“So, there was a lot of politics there as well,” Campbell said. “But it does illustrate that all of those types of options are on the table.”

A new poll out Tuesday indicates that the Medicaid option is not popular with voters either.

Crypto options more likely

An idea that does seem likely is opening up retirement accounts to alternative investments and cryptocurrency options. One of the fastest-growing classes of exchange-traded funds, crypto nonetheless remains a limited option in the 401(k) space.

That is sure to change.

Trump proposed the creation of a strategic reserve of Bitcoin for the United States and nominated Paul Atkins, a cryptocurrency advocate, to chair the Securities and Exchange Commission.

Any administration crypto moves will likely come after the SEC has conducted its review, Campbell said.

The Trump administration is “basically saying we need a comprehensive system of regulation that makes sense, rather than being negative without a comprehensive system, which is a reasonably fair way to say how both the SEC and DOL were approaching crypto issues under the Biden administration,” he added.

In March 2022, the Department of Labor published a rare compliance assistance release cautioning plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu.

Likewise, private equity firms are aggressively lobbying to be an option within Americans’ tax-deferred defined contribution plans. Critics, especially consumer advocates, say fees are higher and private equity options are difficult for everyday Americans to fully understand.

“I think the private equity industry sees all the money in 401(k) plans, and wants to be a part of that, and believes that they can contribute positively,” said Fred Reish, partner at Faegre Drinker Biddle & Reath.

The Employee Retirement Income Security Act blocks private equity from gaining access to 401(k)s.

“I think it's a good guess that whether it's cryptocurrency, private equity, kind of a variety of alternative investments, that we're likely to see a more receptive Trump administration to that,” Cambell concluded.

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