Much has been made in the past week of a potential drastic change to 401k plans should Joe Biden win the White House in November.
Among the Democratic presidential nominee’s various tax proposals—and there are many of them—is one that could potentially be a game-changer for defined contribution plans.
Here’s what “The Biden Plan for Older Americans” has to say about it, in Section IV, titled, Eqaulize Saving Incentives for Middle Class Workers:
In the modern retirement landscape, a sound retirement begins with years of diligent saving. While other aspects of the Biden Plan will help raise wages for workers and reduce costs for spending like child care and health insurance, the Biden Plan will also ensure that middle-class families get a leg up as they grow their nest egg.
Under current law, the tax code affords workers over $200 billion each year for various retirement benefits—including saving in 401(k)-type plans or IRAs. While these benefits help workers reach their retirement goals, many are poorly designed to help low- and middle-income savers—about two-thirds of the benefit goes to the wealthiest 20% of families. The Biden Plan will make these savings more equal so that middle class families can enter retirement with enough savings to support a healthy and secure retirement. President Biden will do so by:
- Equalizing the tax benefits of defined contribution plans. The current tax benefits for retirement savings are based on the concept of deferral, whereby savers get to exclude their retirement contributions from tax, see their savings grow tax free, and then pay taxes when they withdraw money from their account. This system provides upper-income families with a much stronger tax break for saving and a limited benefit for middle-class and other workers with lower earnings. The Biden Plan will equalize benefits across the income scale, so that low- and middle-income workers will also get a tax break when they put money away for retirement.
The basic thought is the proposal would replace pretax 401k contributions that Biden believes provide outsize tax benefits to the rich, and instead everyone would get a flat tax credit.
One explanation of this, as written in Roll Call, puts it this way:
“…take a single filer in the top 37% bracket making $600,000; for each $1,000 she contributes to a 401k plan, her tax deduction is worth $370. A single filer earning $60,000, however, would be in the 22% bracket and only receive a $220 tax break for that same $1,000 contribution.”
Under the Biden plan, Roll Call adds, “someone earning $600,000 would get the same tax break as someone making $60,000—an identical $260 tax credit for their $1,000 retirement contribution. The credit would also be refundable, so someone earning too little for the credit to fully offset their income tax liability would still get the full tax credit.”
Would employers lose incentive to offer 401ks?
Since being brought to light in the past week, this proposal, which also appears in the Biden-Sanders Unity Task Force Recommendations, has been heavily analyzed around the industry in an effort to try to understand how this would be accomplished, how it would impact traditional 401k plans, and what the chances are of it actually happening.
Much of the retirement industry concern expressed to date centers around the potential loss of incentive for smaller employers to even continue to offer 401k plans for their workers if they lose their tax incentives for doing so.
American Retirement Association CEO Brian Graff was recently quoted as saying, “Among ARA concerns would be how reduced tax incentives for small business owners would impact their willingness to make matching and other contributions or, even more worrisome, to have a plan in the first place.”
While noting the Biden tax plan seems short on details, Pentegra SVP – Client Services Richard Rausser agrees this could be a problem.
“Our concern is that this plan would negatively impact small business owner’s incentive to make matching contributions for their employees,” Rausser told 401k Specialist this week. “Furthermore, it may actually reduce their desire to sponsor any retirement plan at all.”
Will it even be attempted?
Perhaps this is much ado about nothing?
Some say if Biden takes the White House, he’ll have plenty of other issues to worry about before he would attempt a major overhaul of 401k plans, which is just one of at least 50 specific tax changes the Biden platform has listed to date. About half are aimed at high-income households and the other half at business as he seeks to raise taxes by about $4 trillion over the next decade.
Not to mention that if the Democrats do not win control of the Senate while maintaining control in the House, Biden’s tax agenda may be dead on arrival anyhow. And would any tax increase make sense while the country is still mired in a COVID-19 economy?
Paul Richman, chief government and political affairs officer at the Insured Retirement Institute, told 401k Specialist he thinks there are going to be many other pressing issues that need to be dealt with “before they start making significant or dramatic changes to the tax code, particularly as it relates to retirement savings.”
And he thinks a major structural change such as the one relating to 401ks could not be done overnight.
“Before any changes are made I think that there needs to be some studies done as to what the behavioral impacts would be in making a drastic change to a system that’s been in place for so many years,” Richman said.
“We think there’s a lot of other ways before we get to making a dramatic change to the tax code without further study, discussion, dialogue and debate amongst all the interested parties,” Richman said, referring to Congress, a potential Biden administration, the retirement industry and consumer advocates. All that, Richman said, “would need to occur before a change like that is enacted into law.”
He said organizations such as IRI would want to ensure that examination takes place to determine what the impact would be on retirement strategy and whether or not it would jeopardize Americans’ retirement security.
In the meantime, while there are some guesses about how the 401k tax changes would be implemented, the concrete details are still lacking.
“The plan they proposed on their website really doesn’t offer enough details for us to make a judgment right now as top whether we should support it, should we suggest some changes to it, or should we oppose it,” Richman said. “We need to get a lot more details to see what that plan would do.”
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