Tax Reform Could Threaten Small Business Retirement Plan Incentives

The American Retirement Association says that the tax reform proposals that Congress is currently assessing could be a disincentive for small business owners to offer retirement plans because their retirement plan contributions, when ultimately distributed to the owner at retirement, will likely be taxed at the 35% individual income tax rate, says Nevin Adams, chief content officer of the Association, based in Arlington, Virginia.

The Senate bill proposes charging small business owners a marginal tax rate of 27% on their business income. This means that small business owners with qualified business income will potentially pay much higher taxes on their deferred income contribution to a retirement plan (35%) as compared to simply paying income tax currently at the lower qualified business income tax rate (27%) under the Senate Finance Committee bill, Adams says.  

If changes are not made to the Senate’s proposal, retirement plan advisers serving this market will also be impacted, because “small business owners will lose a significant motivation for putting aside money for their own retirement and for their workers, and there already is a huge coverage gap among small businesses,” Adams says.

The American Benefits Council points to research by the Employee Benefits Research Institute that shows that without a workplace retirement plan, small business employees are 15 times less likely to save for retirement.