Senate Democrats to GOP: Hands Off Middle-Class Retirement Savings

In a preemptive move against retirement provisions in the forthcoming House Republican tax reform plan, Senate Democratic leaders yesterday unveiled an alternative proposal that, among other things, would increase 401(k) contribution limits.

In an Oct. 31 press conference with several other Democratic senators, Senate Democratic Leader Charles Schumer (D-NY) said the House Republican plan would have far-reaching consequences for middle-class households trying to save for retirement. “No matter which way you slice it, what the Republicans plan to do to 401(k)s is an immediate tax hike on American families’ retirement plans, period,” Schumer contended.

Schumer acknowledged that he did not know exactly what retirement provisions would be in the House Republican proposal, but he noted that press reports indicate that the proposal would move the cap on pre-tax contributions to 401(k)s down to $2,400 from the current level of $18,000.

For his part, Senate Finance Committee ranking Democrat Ron Wyden (D-OR) noted that Republicans have already attacked middle-class retirement savings by eliminating the Obama-era safe harbor regulations for state-run retirement plans and by trying to eliminate the DOL’s fiduciary rule.

Schumer suggested that Republicans “should abandon any plan to tax 401(k)s and work with Democrats in a bipartisan way to expand retirement savings, not to cut them.”

The proposal has three parts:

Increase contribution limits: According to a summary, the Senate Democratic proposal would increase the existing 401(k) contribution limits from $18,500 in 2018 to $24,500 for all taxpayers on a pre-tax basis and include as part of the increase the $6,000 catch-up limit so that individuals age 50 or older could save up to $30,500 per year.

Employer tax credit for matching contributions: The proposal also seeks to protect the pretax treatment of matching contributions and incentivize employers to offer matching contributions by providing a tax credit equal to a percentage of the employer’s match. The summary suggests a tax credit equal to 25% of the employer’s match, but notes that Democrats are open to discussing the specific level with Republicans.

Auto-IRAs: A proposal that has been around for the last several years, Senate Democrats would make auto-IRAs available as a savings option for Americans who do not have employer-sponsored retirement plans. Under the program, employers that do not offer a retirement savings plan would automatically enroll their workers in payroll deduction contributions to an IRA. Contributions would be set at a default rate and escalate after the initial year of participation. Workers would be able to opt-out or select a different savings rate, and they could choose whether the IRA is a traditional or Roth IRA.

If all goes as anticipated, House Ways and Means Committee Chairman Kevin Brady (R-TX) will release the House Republican tax reform proposal this week.

The ARA last week released a set of retirement policy principles for tax reform, arguing, among other things, that any changes to current retirement savings incentives must be primarily aimed at promoting retirement plan participation and encouraging savings, rather than solely for the purpose of raising revenue for other tax objectives. The ARA will be closely monitoring these developments and will provide additional updates as events warrant.

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