December 11, 2012
Revised-For immediate release
For additional information:
cell 202-422-4652 (cell)
Survey says: taxation of 401(k) contributions will lead to fewer plans, less retirement security
Impact on employees of large companies could be most severe; Council urges Congress not to erode retirement savings
WASHINGTON, DC Curtailing the current tax treatment of contributions that workers and their employers make to 401(k) retirement savings plans will significant reduce employers’ willingness to sponsor plans and employees’ ability to save. A survey of over 500 companies, conducted by Mathew Greenwald & Associates, Inc. in partnership with the American Benefits Institute*, clearly demonstrates the important role of tax incentives for workplace retirement income security.
“As part of a deal to avoid the ‘fiscal cliff’, or in the context of broader deficit reduction next year, the current tax-deferred treatment of 401(k) contributions could be changed to generate short-term federal revenue,” said Council President James A. Klein, describing the impetus for the survey. This survey demonstrates that it would be short-sighted and ill-advised for Congress and the President to do so. Retirement plan contributions are not ‘tax breaks’ or ‘loopholes.’ Retirees pay income tax on the benefits they receive,” noted Klein.
“We realize President Obama and Congress have a difficult task and every interest group wants to preserve its cherished tax provision. But not all tax expenditures are created equal. This survey finds that virtually all employers (91%) believe the exclusion of 401(k) contributions from current income taxation is important to their workers’ decision to contribute to the plan and seven in ten employers (72%) think their workers contribute more than they otherwise would as a result of the exclusion. Without a robust private employer-sponsored retirement system, Americans will be less well prepared for retirement, and pressure on public programs like Social Security will grow. That is a lose-lose situation for both retirees and the government and is completely contrary to the goals of deficit reduction,” asserted Klein.
The survey also solicited employer reactions to specific tax proposals:
- the “20-20” proposal, in which total contributions would be limited to the lesser of $20,000 or 20 percent of compensation;
- the refundable tax credit proposal, in which total contributions would no longer be excluded from income tax, but employees would receive a tax credit equal to some percentage of their yearly contributions; and
- the 28 percent proposal, whereby the tax exclusion of plan contributions for workers in the 35% tax bracket would be limited to 28% -- effectively imposing a 7% tax on employee and employer contributions.
Employer opinion strongly suggests that such measures would be extremely counterproductive. “Between one-third and one-half of employers think these proposals would cause them to drop or consider dropping their 401(k) plan. Quite remarkably, the likelihood an employer would drop or consider dropping its plan, or eliminate or reduce features like matching contributions or auto-escalation of contributions actually increases among larger employers. For example, overall, 20 percent of employers said that enactment of the ‘Simpson-Bowles’ retirement proposal would cause them to reduce or eliminate 401(k) matching contributions. But for employers with more than 1,000 workers, the number more than doubles to 45 percent,” Klein said.
According to the survey, employers also believe that their employees would save less under these proposals. “Between 40 and 60 percent of employers feel these proposals would reduce the value of a retirement savings plan for employees and think their employees would be likely to decrease or eliminate their plan contributions if such proposals were enacted,” Klein said.
Klein concluded, “Workplace retirement savings plans are essential for employee recruitment and retention, for ensuring workers’ long-term financial security, and they represent a critical source of investment capital needed for economic stability and growth. Congress faces urgent decisions in the next 20 days. But it should not make hasty decisions that will undermine the long-term financial health of the country and its aging population,” Klein concluded.
For more information on retirement savings, or to arrange an interview with Council policy staff, please contact Jason Hammersla, Council director of communications, at firstname.lastname@example.org or by phone at 202-289-6700 (office) or (202) 422-4652 (cell).
The survey results are available here. Also available on the Council web site:
- 401(k) Fast Facts
- Council Talking Points: Proposed Double Taxation of Retirement Plan Benefits Would Jeopardize Retirement Security
- Council Talking Points: 20/20 Cap on Retirement Savings Would Undermine Retirement Security
- Defined Contribution Plans & IRAs: Existing Tax Incentives Effectively and Efficiently Increase Retirement Savings
For more information on retirement savings, or to arrange an interview with Council policy staff, please contact Jason Hammersla, Council director of communications, at 202-289-6700 (office) or (202) 422-4652 (cell).
The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council’s members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.
*The American Benefits Institute is the education and research affiliate of the American Benefits Council. The Institute conducts research on both domestic and international employee benefits policy matters to help public policy officials and other stakeholders make informed decisions
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