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.”

Add Your Comments


  1. Kenneth Nicklas
    Posted December 20, 2012 at 1:11 pm | Permalink

    Do these guys think that small business is the only place to extract $! Just another indicator that Washington only considers the interest of big business and big wealth. Anyone on the ordinary income tax treadmill is fair game for their theft policies. I can’t believe we are going this low and call it for the good of people and country! we should require all elected officials wear a mask so we can truly identify their intent!

  2. Steve Cote
    Posted December 20, 2012 at 1:42 pm | Permalink

    This makes no sense. Since when are elective deferrals to a 401(k) plan itemized deductions or exclusions. Stop trying to scare people!!!!

  3. Alex Assaley
    Posted December 20, 2012 at 9:47 pm | Permalink

    Steve, If a business owner runs their company as a partnership, then they do not have W-2 income. Instead they report earnings on a K1 and their 401k elective deferrals would then be an itemized deduction for their annual tax filing. This would actually be pretty common for an LLC taxed as a partnership. I think that is what the article is getting at.

  4. Steve Cote
    Posted December 21, 2012 at 3:26 pm | Permalink


    Do your homework. Qualified plan contributions are deducted on line 28 on form 1040. This is a deduction before adjusted gross income, not an itemized deduction. This is nothing more than a scare tactic and needs to be pointed out as such. Don’t beleive everything you read on the internet.

  5. Tom Finnegan
    Posted December 22, 2012 at 4:27 pm | Permalink

    the presidents proposal extends the 28 % value provision to both exclusions from income and from itemized deductions. This drags in things such as municipal bond interest and 401(k) salary deferrals. by serving as a surtax on salary deferrals for those in greater than a 28% bracket, it serves as a significant disincentive for small businesses to start or maintain 401(k) plans for their employees

  6. Quentin Ledford
    Posted December 25, 2012 at 11:11 am | Permalink

    Congress currently consists of the largest lot of inconsiderate, ill-informed, and self-serving lot the United States has ever seen. These are the folks that are spending the wealth of the citizenry as if there is no tomorrow. Worse than that, these are doing everything in their power to make it harder on anyone trying to better themselves and their communities. The interests of the U.S. citizenry have been jettisoned decades ago and the voters completely disenfranchised by all players (Ds and Rs). When it costs tens of millions to run for a Congressional seat and a billion dollars to run for President, it bears asking…’Who are these folks representing?’

    If Congress really had any concern for the people, instead of pulling every trick out of their hat to disintegrate the private sector, they would focus on creating an environment which rewarded businesses (particularly small businesses) for investing and hiring folks from the governmental and welfare sectors.

    Although economic power in the hands of individuals may be used as a force of coercion, centralized and concentrated in the hands of government it becomes tantamount to slavery. When the private sector perishes, the people starve.

    Investing in treasuries does nothing to stimulate the economy. These do serve as tax havens for the well-heeled (just ask Suze Orman). What if the government capped the amount of money as the higher of a certain dollar amount or a percentage of assets (say 25%) and taxed any gains on the excess as regular income, the gains would then be greater than those realized by raising taxes on capital gains and dividends.

  7. Alex Assaley
    Posted December 26, 2012 at 4:34 pm | Permalink


    I misspoke and meant to say exclusion as opposed to itemized deduction. I think you will understand this simple error in term, given you errors in spelling. While I would agree with you that his may be overblown, this proposal to limit qualified account pre-tax contributions is a serious consideration in current administration negotiations. I certainly appreciate all of the negativity in your posts, however. Thanks.

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