Industry Group Defends Retirement Plan Tax Incentives

The coalition’s letter opens by commending Camp and the rest of the Ways and Means Committee for “working to simplify the tax code.” The coalition also thanks Camp for developing a so-called “discussion draft” of a new tax code that it says presents a blueprint for a “simpler and fairer” system of taxation.

The discussion draft referred to by the coalition is a sweeping, 979-page bill introduced by Camp in late February (see “Industry Groups Raising Alarms About Tax Reform”). While the Camp proposal does not include taxation of retirement contribution amounts and benefits caps that President Obama suggested in earlier budget proposals, the document includes a number of similar or new provisions the Coalition to Preserve Retirement says will diminish incentives for retirement saving and discourage retirement plan benefit offerings.

“It is the foundation for a long, and hopefully productive, debate,” reads the coalition’s letter. “While the spirit of the discussion draft serves as a catalyst for constructive discussion, there are several provisions that are of concern and could negatively impact retirement savings opportunities for working Americans.”

As an initial matter, the coalition warns lawmakers it is important to distinguish a tax deferral from a tax exclusion or deduction. Unlike a tax exclusion or deduction, tax deferral in retirement plans increases taxes paid when the taxpayer receives distributions from the plan. Not appreciating this distinction can lead to unintended policy choices, the coalition says.

The coalition then points to several features of the Camp proposal that do not seem to account for this distinction. For instance, the draft would freeze for a decade the annual inflation adjustments to the limits on annual contributions to retirement plans and individual retirement accounts (IRAs). The coalition says this would have a significant and negative cumulative impact on individuals’ ability to save for their retirement. Under the proposal, the defined contribution (DC) plan elective deferral limit is projected to be about $4,500 lower by 2024 than it would be under current law, a reduction of more than 20%.

The coalition warns that eliminating inflation adjustments for contribution limits for 10 years could also substantially increase the percentage of participants who are considered so-called “highly compensated employees” and therefore will further depress middle-income workers’ savings maximums.

The proposed reform also would impose on higher earners an upfront tax on retirement contributions—on both tax-deferred employee contributions and on employer contributions. The coalition says this 10% “surtax” would be imposed as contributions are made to a plan. These same contributions would be taxed a second time (at ordinary rates) when the savings are distributed from the plan during retirement.

Those subject to the 10% surtax, especially those near retirement, could find they would be better off simply saving in a taxable account, argues the coalition. Some employers, particularly small-business owners, may decide that the tax benefits no longer justify the expense of sponsoring a retirement plan.

The coalition argues that other provisions in the discussion draft create uncertainty and could possibly dissuade individuals from participating in a retirement plan. One element, the requirement that employee contributions above a certain amount to a 401(k) or similar plan be made on a Roth basis, will add complexity and could increase administrative costs, it contends. The current system is widely understood by employees, the coalition says, and changes to the types of vehicles and saving limits could be a disincentive for future savings.

Finally, the repeal of the small-employer pension plan startup credit removes a valuable incentive to business owners considering establishing a plan for their workers, the coalition says.

The letter concludes by arguing that the current structure for employer-provided and individual retirement plans is a key component of the U.S. retirement system and is leading to at least some measure of retirement success for many Americans. “The coalition hopes that as tax reform discussions continue, Congress will consider the success of the current retirement tax structure as it weighs comprehensive tax reform legislation,” reads the letter.

The Coalition to Preserve Retirement is composed of the following associations: American Benefits Council, American Council of Life Insurers, American Society of Pension Professionals and Actuaries, The ERISA [Employee Retirement Income Security Act] Industry Committee (ERIC), ESOP [Employee Stock Ownership Plan] Association, Insured Retirement Institute, Investment Company Institute, Plan Sponsor Council of America, Securities Industry and Financial Markets Association and the Society for Human Resource Management.