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Taxing 401(k)s Will Lead to Fewer Plans, Less Retirement Security, Survey Finds

Curtailing the current tax treatment of contributions that workers and their employers make to 401(k) plans will significantly reduce employers’ willingness to sponsor plans and employees’ ability to save, according to a survey of more than 500 companies conducted by Mathew Greenwald & Associates, Inc. and the American Benefits Institute, the education and research affiliate of the American Benefits Council (ABC).
 
The impetus for the survey: The possibility that the current tax-deferred treatment of 401(k) contributions could be slashed as Congress tackles tax reform next year. The survey “demonstrates that it would be short-sighted and ill-advised for Congress and the president to do so,” ABC President James A. Klein said in a press release. “Retirement plan contributions are not ‘tax breaks’ or ‘loopholes.’ Retirees pay income tax on the benefits they receive,” noted Klein. Among the survey results:
• 91% of employers believe the exclusion of 401(k) contributions from current income taxation is important to their workers’ decision to contribute to the plan.
• 72% think their workers currently contribute more than they otherwise would as a result of the exclusion. 
 
The survey also solicited employer reactions to three tax proposals:
• the “20-20” proposal, in which total contributions would be limited to the lesser of $20,000 or 20% 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; and
• the 28% proposal, whereby the tax exclusion of plan contributions for workers in the 35% tax bracket would be limited to 28% — effectively imposing a 7% tax on employee and employer contributions.
 
Survey results strongly suggest that such measures would be extremely counterproductive. “Between one-third and one-half of employers think these proposals would cause them to drop or consider dropping their 401(k) plans,” Klein said. Moreover, this is not a solely small-plan concern. “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. For example, overall, 20% of employers said that enactment of the ‘Simpson-Bowles’ retirement proposal would cause them to reduce or eliminate 401(k) matching contributions. But for employers with more than 1,000 workers, the number more than doubles, to 45%.”

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