Call to Cap 401(k) Savings by ‘Wealthy’ Is Contentious

529 college savings plans also came under fire in 2015 State of the Union address

By Stephen Miller, CEBS Jan 21, 2015
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updated 1/27/2015

In his 2015 State of the Union address, President Barack Obama outlined his plans to reduce many tax deductions for those deemed to be “the wealthiest Americans” in order to fund his new spending proposals.

Among the most controversial of these items, and one that’s generating criticism from many in the employee benefits community, is the president’s proposal to (as a White House fact sheet put it) “Prevent wealthy individuals from using loopholes to accumulate huge amounts of tax-favored retirement benefits.”

The president’s plan, which has previously been promoted by the administration but was reintroduced around his State of the Union address, would prohibit contributions to and accruals of additional benefits in tax-preferred 401(k) and other defined contribution retirement plans, as well as in individual retirement accounts (IRAs), once total balances in an individual’s combined retirement accounts grow large enough to provide an annual income of $210,000 in retirement if annuitized (about $3.4 million given current interest rates). Any income received from a defined benefit pension plan would also count under the $210,000 income cap.

As reported by the Washington Post, among others, an impetus to limit retirement plan assets was Mitt Romney’s IRA, estimated to be worth at least $20.7 million (and possibly as much as $101.6 million) when he ran for president in 2012. “Obama wants to limit the ability of extremely wealthy individuals to take advantage of these accounts,” wrote Matthew Yglesias, on the liberal website Vox.

But the president’s proposal raised alarm bells for others. “Retirement savings policy need not be a ‘zero sum game.’ Restricting savings for some workers does not help others achieve retirement security,” said American Benefits Council President James A. Klein, in a released statement. “Portraying the president's proposal as limiting retirement plan balances to ‘about $3.4 million’ is very misleading,” Klein argued. “In today's extremely low interest rate environment, [annuitized annual income of $210,000] equates to about $3.4 million. But given historical interest rates the government uses for pension calculations, the allowable account balance for a 35 year old worker would be about $300,000.”

He added, “Politically, it is convenient to target people who have saved $3.4 million. But the devil is in the details when you look at the impact on younger workers and the inevitability that interest rates will rise over the coming decades. Savings today are needed to ensure retirement security for years into the future. We must not erode long-term economic security for short-term revenue gains.”

“Americans strongly support current tax incentives for retirement saving and want those benefits to be preserved,” concurred Paul Schott Stevens, president and CEO of the Investment Company Institute (ICI), an industry group, in a released statement. “All workers, regardless of income, benefit from the current tax treatment for retirement plan saving, and we urge policymakers, as they consider legislation in this area, not to curtail these important incentives to save for retirement.”

A January 2015 ICI survey report found that 88 percent of U.S. households disagreed with the notion that the government should take away the tax advantages of defined contribution retirement plan accounts, and 90 percent disagreed with reducing the amount that individuals can contribute to these accounts.​

“The administration’s proposal to cap tax-favored retirement savings plans could affect significant numbers of workers should interest rates return to their historically higher levels,” concluded an earlier analysis by the nonprofit Employee Benefit Research Institute (EBRI). “While relatively few 401(k) participants would be affected by this at first, the impact would likely spread over time, perhaps substantially, depending on interest rates and whether individuals also participate in a defined benefit retirement plan,” said Jack VanDerhei, research director at EBRI and author of the study.

Other Retirement Savings Proposals

The benefits community was more supportive of the intent behind some the president’s other retirement savings proposals. Among these were the following:

  • Automatically enroll Americans without access to a workplace retirement plan in an IRA. Under the proposal, every employer with more than 10 employees that does not currently offer a retirement plan would be required to automatically enroll their workers in an IRA. These auto IRAs would let workers opt out of saving if they elect not to participate.
  • To minimize the burden on small businesses, the president’s auto IRA proposal would provide any employer with 100 or fewer employees that offers an auto IRA a $3,000 tax credit. The president also proposes to triple the existing “start up” credit, so small employers who newly offer a retirement plan would receive a $4,500 tax credit to offset administrative expenses. Small employers that already offer a plan and add auto enrollment would get an additional $1,500 tax credit.
  • Ensure long-term, part-time workers can contribute to their employer’s retirement plan. Currently, employers offering retirement plans are allowed to exclude employees who work less than 1,000 hours per year. The president proposed to expand access for part-time workers by requiring employers that offer defined contribution retirement plans to permit employees who have worked for the employer for at least 500 hours per year for 3 years or more to make voluntary contributions to the plan.

According to the White House fact sheet, “These proposals would give 30 million additional workers access to a workplace savings opportunity and would complement the president’s actions over the past year to make saving for retirement easier by creating the simple, risk-free and low-cost “myRA” starter savings vehicle.” The president first proposed myRAs—which stands for “my retirement accounts”—one year earlier, in his 2014 State of the Union address. The Treasury Department issued a final rule clearing the way for myRAs in December 2014.

"We commend President Obama for trying to help expand access to savings and make it easier for small businesses to support employee savings,” Klein said. He added that enacting policies that will enhance retirement security should be “an effort on which Democrats, Republicans, businesses and participant groups ought to be united.”

“While these proposals would all need the approval of congress, they may well be able to rise above the usual political maneuvering,” said William G. Gale, director of the Brookings Institute’s Retirement Security Project, in an online post. “For instance, both left and right have made positive comments about the automatic IRA, and businesses should support the call for expanded tax credits to cover their costs in implementing the plans.”

Commented Kathleen Coulombe, senior advisor for government relations at the Society for Human Resource Management (SHRM), “Based on feedback from SHRM members, they feel strongly that a comprehensive and flexible benefits package is an essential tool in recruiting and retaining talented employees and that the government should facilitate and encourage voluntary employer-sponsored retirement plans.”

However, “several provisions that were highlighted by the president contain employer mandates, which we feel inhibit an employer’s ability to craft a flexible benefits packages that is reflective of the needs and interest of their workforce,” reflected Coulombe. “Employers should not be mandated to auto enroll or change their plan criteria, but instead be given the flexibility to carefully craft a retirement plan, as well as educate their workforce on the benefits of saving for retirement.” ​

529 College Savings Plans Targeted (and Reprieved)

In another contentious proposal made during his State of the Union address, President Obama called for reducing the benefits of savings for college through a tax-advantaged 529 savings plan. Some employers provide 529 plans as an employee benefit.

Under a 529 plan, participants currently can contribute $14,000 (in after-tax money) each year for a child, pay no tax on the money while it's growing, and no tax when they withdraw it to pay for education costs.

Under the president’s proposal, savings would still grow tax deferred, but withdrawals to pay for college would be taxed to the beneficiary, typically the child in school, as ordinary income. These changes would only affect new 529 plan contributions. The White House said the goal was to better target federal assistance to those who need it.

“529 plans have succeeded in getting millions of mostly middle-class American families to save toward future college expenses. Why penalize such families under the guise of paying for free community college and other government programs?,” said Joseph Hurley, founder of Savingforcollege.com, a 529 savings plan website.

But Jordan Weissmann, economics correspondent at the liberal website Slate, wrote in favor of the proposal, citing a Government Accountability Office finding that 47 percent of families with 529 plans or similar Coverdell accounts earned more than $150,000 per year. “Obama wants to tax college savers. But, by and large, they're wealthy college savers,” Weissmann contended.

Update: Just one week after proposing the idea in his State of the Union Address, on Jan. 27 President Obama retracted his proposal to tax as income withdrawals from 529 college savings plans "after criticism from Republicans and members of his own party," Time reported.


Stephen Miller
, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

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