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Obama’s Offer on Fiscal Cliff Would Endanger Small Businesses’ 401(k) Plans

A provision in President Obama’s latest proposal to avoid the pending fiscal cliff would penalize small business owners by subjecting them to double taxation, according to Brian H. Graff, CEO/Executive Director of NAPA and ASPPA.

The president’s latest offer to House Speaker John Boehner (R-OH) in their ongoing negotiations to avoid the fiscal cliff includes a 28% cap on the current tax benefit for itemized deductions and exclusions (35% for charitable contributions). This means that a small business owner with a marginal tax rate of more than 28% will pay a surcharge on elective deferrals to a 401(k) plan in the year in which the contributions are made — and then pay tax again on the full amount when those contributions are paid out at retirement, Graff explains.

“Simply put, this amounts to double taxation,” says Graff. “Penalizing small business owners for sponsoring a retirement plan that benefits small business workers would be an unfortunate outcome of these fiscal cliff negotiations. A double tax penalty will only discourage small business owners from setting up and maintaining 401(k) plans. The result will be reduced retirement plan coverage, threatening workers’ retirement security.”

Of the myriad tax incentives that currently exist, the deferral for retirement savings is the only one that would be subject to this double taxation because it’s the only one that is a deferral, and not a tax deduction or exclusion, Graff notes.

“Getting our fiscal house in order should not come at the expense of our future retirement security,” declares Graff. “We urge the president and Congress not to put American workers retirement plans at risk.”

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