The Fight for Retirement Plan Tax Advantages

At year-end, the Bush-regime tax cuts will expire, noted Michael Falcon, head of Retirement, J.P. Morgan Asset Management, during a client call. If tax cuts are extended, Congress will look for ways to offset those cuts.  

Bob Holcomb, Legislative and Regulatory Affairs, J.P. Morgan Retirement Plan Services, said the government sees its top three tax expenditures as employer-provided health care, retirement plan and IRA exemptions, and mortgage interest exemptions. Ideas have been proposed to cap retirement plan contributions and to tax a percentage of defined contribution plan contributions as if they were Roth contributions.   

Also in the mix is capping the compensation limit that can be taken into account for pre-tax contributions, added Lynn Dudley, SVP, American Benefits Council. She notes that capping itemized deductions would limit the value of tax exclusions for retirement plans and take away some tax incentive for retirement savings. Sponsors will be less willing to sponsor retirement plans if there is no benefit for themselves or participants, Holcomb added.  

According to Holcomb, the argument against these ideas is that retirement-related tax expenditures do not leave the system; the government is not forfeiting taxes, it is financing money for participants. But, the government is only looking at a 10-year window, not the long term. Dudley said the argument that should be presented is that it is actually of value to the government to delay taxes because accounts grow, and more will come out of the plan than goes in. “It is an uphill effort to educate about the value of pre-tax savings,” she conceded.  

The good news, according to Holcomb, is that employers are realizing the value of offering a vehicle for employees to save and are committed to retirement plans. The treatment of retirement plans will be part of overall tax reform, so employers should look at the big picture for the meaning of reforms for them and their businesses.

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Going Forward  

There is some opportunity; tax reform is a good vehicle for positive pension reform, Holcomb said. He is hopeful the industry can get some reform that will make day-to-day plan administration easier for plan sponsors.  

Holcomb added that if Mitt Romney had been elected, we would be wondering who he would pick to head up Treasury and Department of Labor (DOL) offices; things would be quiet until the appointments were made. However, since the administration will likely stay the same, we have a clear picture of what to expect. Holcomb believes we will get the fiduciary definition re-proposal as well as proposed regulations early next year about lifetime income projections on participant statements. Holcomb thinks there will be a mandate to provide the projections on statements.  

Dudley said, in general, because it is the second administration for the president, there is a likelihood that agencies will have freer reign as far as regulations go, so they will go further than they have in the past four years. Regulations will be more sweeping. For example, the fiduciary definition will sweep more people in. Dudley contended it will be a broader approach, and employers will have to be much more careful about who is talking to whom and about investment offerings.  

Dudley added that there is a strong sense in the administration that lifetime income is a problem, and it is looking for every way to shift from a lump sum frame of mind to an annuity frame of mind. Treasury will look for ways employers can offer guaranteed payments through retirement plans, she said.