Groups Defend 401(k) Plans' Tax Incentives

Coalition encourages more, not fewer, incentives to save

By Stephen Miller, CEBS Nov 16, 2012

As President Barack Obama and Congress grapple with proposals to reduce the U.S. federal budget deficit in the wake of the looming "fiscal cliff" — and with a larger effort to overhaul the federal tax code expected in 2013 — the Society for Human Resource Management (SHRM) and groups that represent retirement plan sponsors are emphasizing the importance of maintaining existing tax incentives for contributions to 401(k) and other employer-provided retirement plans.

President Obama has said he wants to increase tax revenue by about $1.6 trillion over 10 years. Some deficit-reduction proposals have suggested restricting or eliminating pre-tax contributions to retirement plans, lowering allowable elective deferrals and abolishing catch-up contributions.

In response, SHRM is chairing the Coalition to Protect Retirement (CPR), an alliance of groups working to safeguard retirement savings plans. The coalition recently launched a website,, that encourages contacting members of Congress to tell them "there should be more—not fewer—incentives to save."

A November 2012 SHRM fact sheet,The Effects of Tax Reform and Deficit Reduction on Employee Benefits, states: "SHRM believes tax incentives should be used to expand retirement savings. Provisions that encourage savings, such as increased contribution limits and catch-up contributions for older workers, are beneficial. Tax incentives should be provided to employers that sponsor plans and to individual savings accounts on an equitable basis."

"A comprehensive and flexible benefits package is an essential tool in recruiting and retaining talented employees," said Kathleen A. Coulombe, senior associate with SHRM Government Affairs. "The government should facilitate and encourage voluntary employer-sponsored plans, as well as individual savings."

SHRM also supports House Concurrent Resolution 101, introduced by Reps. Richard Neal (D-Mass.) and Jim Gerlach (R-Pa.), and the Senate Concurrent Resolution to be introduced by Sens. Richard Blumenthal (D-Conn.) and Johnny Isakson (R-Ga.). These identical resolutions declare the importance of employer-sponsored retirement plans and express the desire of members of Congress to preserve the current tax treatment of retirement plans.

'Too High a Cost' to Retirement Savings

In a similar effort, in October 2012 the American Benefits Council, representing large U.S. employers, issued a white paper defending existing tax incentives as vital to increasing retirement savings.

"This tax incentive structure is a pillar of our successful private retirement savings system. It provides a strong incentive for workers at all income levels to save for retirement and encourages employers to sponsor plans that deliver critical benefits to Americans at all incomes," the council contended. Proposals to reduce the retirement savings tax exclusion would "very likely lead to a decline in savings levels and reduced plan sponsorship by employers, both of which would have detrimental effects for the retirement prospect of American families and for our economy as a whole."

The American Society of Pension Professionals & Actuaries (ASPPA), a professional association, also is defending broad-based retirement plan tax incentives.

“While changes need to be made to confront the looming fiscal crisis, proposals to make drastic cuts to retirement tax incentives in the name of fiscal reform come at too high a cost to American workers’ retirement security," said ASPPA Executive Director Brian H. Graff, in a media statement.

"The retirement savings tax incentive is a deferral, not a permanent exclusion. Every dollar deferred today is taxed tomorrow when it is withdrawn as retirement income," said Graff. He argued that limiting the tax exemption for plan contributions would result in "illusory revenue gains and reduced retirement security," adding, "We can’t afford the hit in retirement savings American workers would take from this flawed policy.”

EBRI: Don't Cut Retirement Plan Tax Advantages

A 2011 analysis from the not-for-profit Employee Benefit Research Institute (EBRI) found that the U.S. National Commission on Fiscal Responsibility and Reform's proposed tax changes for 401(k)-type retirement plans would cause the greatest reduction in retirement savings for the highest- and lowest-income workers.

Under current law, for 2013 the combination of worker and employer 401(k) contributions is capped at the lesser of $51,000 per year or 100 percent of an employee’s compensation. The so-called Simpson-Bowles commission recommended capping the annual tax preferred contributions for defined contribution retirement plans to “the lower of $20,000 or 20 percent of income” (known as the 20/20 cap). EBRI's research found that this would affect not just high-income workers, but would cause a big reduction in retirement savings by the lowest-income workers as well.

For each age group (except for the oldest), the lowest-income group would have the second-highest average percentage reductions in 401(k) contributions if the commission's recommendation was enacted, EBRI's analysis showed. Primarily, this was because their current or expected future contributions would exceed 20 percent of compensation when combined with employer contributions.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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