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Changing the tax treatment of contributions workers and employers make to 401(k) retirement savings plans would significantly reduce participation.

Survey Says Taxing 401(k) Contributions Could Lead to Fewer Plans

  • 12/19/2012

Survey Says Taxing 401(k) Contributions Could Lead to Fewer Plans

Curtailing the current tax treatment of contributions that workers and their employers make to 401(k) retirement savings plans would significantly reduce the willingness of employers to sponsor plans and the ability of employees to save, according to a survey of more than 500 companies by the American Benefits Institute (ABI).

The survey found that 91 percent of employers believe the exclusion of 401(k) contributions from current income taxation is important to their workers’ decision to contribute to the plan, and 72 percent of employers think their workers contribute more than they otherwise would as a result of the exclusion.

"Between one-third and one-half of employers think these proposals would cause them to drop or consider dropping their 401(k) plan," said council president James A. Klein. "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."

Klein said the survey demonstrates that it would be "shortsighted and ill-advised" for Congress and the president to consider generating short-term federal revenue by changing the current tax-deferred treatment of 401(k) contributions as part of a deal to avoid the fiscal cliff, or in the context of broader deficit reduction in 2013.

"Retirement plan contributions are not tax breaks or loopholes. Retirees pay income tax on the benefits they receive," noted 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.
  • The 28 percent proposal, whereby the tax exclusion of plan contributions for workers in the 35 percent tax bracket would be limited to 28 percent, effectively imposing a 7 percent tax on employee and employer contributions.

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