Employers Oppose Changing Retirement Tax

Curtailing the current tax treatment of retirement savings plan contributions will reduce employers’ willingness to sponsor plans and workers’ ability to save, a survey suggests.

Eight in 10 employers say the exclusion of employee contributions (81%) and employer contributions (77%) from current employee income taxation is important in their company’s decision to sponsor a defined contribution (DC) plan. Nearly all employers surveyed (91%) believe that the exclusion of plan contributions from current income taxation is important to their workers’ decision to contribute to the plan and seven in 10 plan sponsors (72%) think their employees contribute more than they otherwise would as a result of the exclusion.  

A majority of employers oppose each of the proposals tested in the survey for modifying the income tax exclusion of DC plan contributions. These proposals were the 20/20 proposal (limiting total contributions to the lesser of $20,000 or 20% of compensation), a 25% tax credit (total contributions would no longer be excluded from income tax, but employees would receive a tax credit), and a tax exclusion limitation (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). Seven in 10 oppose the 25% tax credit (71%, including 37% strongly opposed) and the 20/20 proposal (71%, including 30% strongly opposed). Sixty-three percent oppose the tax exclusion limitation (including 30% strongly opposed).   

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Many employers are convinced that these proposals would reduce the value of a DC plan when it comes to employee recruitment, retention, and motivation. On average, six in 10 think the 25% tax credit would have these effects, while half think the 20/20 proposal and four in 10 think the tax exclusion limitation would do so. In addition, the majority of sponsors believe these proposals would have a negative effect on their employees’ preparation for retirement. Seven in 10 (72%) say the 25% tax credit would have a great deal or some negative effect, while 57% say the 20/20 proposal and half (50%) say the tax exclusion limitation would have a negative effect.

(Cont’d…)

At a minimum, if one of these proposals is passed, many current sponsors would modify their DC plan by decreasing or eliminating one or more plan provisions; some would likely drop their plan altogether. Nearly half (46%) state they would drop or consider dropping their DC plan if the 25% tax credit were passed. One-third each would drop or consider dropping their plan if the 20/20 proposal (34%) or the tax exclusion limitation (35%) were passed.  

Decreases in plan provisions are likely to be most pronounced if the 25% tax credit is passed. If this were to happen, 30% of employers report they would decrease or eliminate non-elective contributions, 29% matching contributions, 26% the amount invested in participant communication and education, and 23% each would decrease or eliminate automatic enrollment, automatic escalation and safe harbor contributions.  

Between 19% and 25% say they would reduce or eliminate these provisions if the tax exclusion limitation is enacted, and between 18% and 23% would reduce or eliminate these provisions if the 20/20 proposal is passed.   

In addition, half of sponsors would react to these changes in income tax exclusion by making changes to nonqualified plans. In the case of the 25% tax credit, one-quarter would start a new non-qualified plan, 19% would expand eligibility for existing non-qualified plans, and 9% would increase contributions to existing non-qualified plans. Of those making changes, six in 10 (60%) report that these changes would reduce the resources committed to qualified plans. The findings for the 20/20 proposal and tax exclusion limitation are very similar.

(Cont’d…)

Employers believe the proposals and any plan modifications made in response are likely to adversely affect worker preparations for retirement. Six in 10 (60%) feel the 25% tax credit, along with any plan changes the company makes in response, will reduce the value of a DC plan for employees. Fewer say the same about the 20/20 proposal (48%) and the tax exclusion limitation (42%).   

Many employers also say that 40% or more of current contributors are likely to decrease or eliminate their plan contributions if the 25% tax credit (36%), 20/20 proposal (26%), or tax exclusion limitation (23%) is passed. The reduction or elimination of the tax exclusion may also prompt employees to request that at least some of the company contributions to their DC plan be redirected as direct compensation. Two-thirds of employers offering a DC plan with employer contributions say this is likely to happen with the 25% tax credit (65%). Forty-eight percent think this is likely to happen with the 20/20 proposal and 46% with the tax exclusion limitation.    

The survey found that large-size employers, particularly those with 1,000 or more workers, often foresee more severe effects from these proposed changes.   

Information for this study was gathered through 15-minute online interviews with 516 employers by Mathew Greenwald & Associates on behalf of the American Benefits Institute, the education and research affiliate of the American Benefits Council. The complete survey report is here.

  

DOL Proposes Abandoned Plan Use in Bankruptcy

The Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA) proposed a rule to help Chapter 7 bankruptcy trustees distribute retirement plan assets.

The proposal would allow such trustees to use EBSA’s existing Abandoned Plan Program to terminate, wind up and distribute benefits from such plans.

The existing Abandoned Plan Program provides streamlined termination and distribution procedures for abandoned individual account plans, including 401(k) plans, under which benefits may be distributed in a manner that can substantially reduce fees charged to participants’ accounts for things such as annual reporting, legal compliance and other administrative services, including termination costs. By making this streamlined process available to Chapter 7 bankruptcy trustees, the time and resources required to wind up a bankrupt company’s retirement plan can be reduced. As a result, plan participants likely will see fewer administrative and termination fees charged to their accounts and should have access to their money sooner.  

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

“The rule we’re proposing today is designed to help workers and retirees of bankrupt companies gain access to their retirement money sooner,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “Far too often, the retired workers of these companies are unable to obtain their hard-earned retirement savings in a timely way. The legal status of a former employer should not impede retirees’ access to their own funds, especially at the very time they need them most.”

Under amendments in 2005 to federal bankruptcy law, if a company in liquidation administered an individual account retirement plan, the company’s Chapter 7 bankruptcy trustee must perform those functions. The Abandoned Plan Program, established in 2006, provides specific guidance on when a plan may be considered abandoned, who may make that determination, and exactly how to terminate the affairs of the plan and make benefit distributions. The program also limits potential fiduciary liability of financial institutions that step in to terminate and wind up plans that have been abandoned by their sponsors.

Read the proposed rule at http://www.dol.gov/find/20121211.

«