The Fight for Retirement Plan Tax Advantages
November 16, 2012 (PLANSPONSOR.com) – In the coming weeks and months, lawmakers will focus on tax reform.
At year-end, the Bush-regime tax cuts will expire, noted Michael Falcon, head of Retirement, J.P. Morgan Asset Management, during a client call.If tax cuts are extended, Congress will look for ways to offset those cuts.
Bob Holcomb, Legislative and Regulatory Affairs, J.P. Morgan Retirement Plan Services, said the government sees its top three tax expenditures as employer-provided health care, retirement plan and IRA exemptions, and mortgage interest exemptions. Ideas have been proposed to cap retirement plan contributions and to tax a percentage of defined contribution plan contributions as if they were Roth contributions.
Also in the mix is capping the compensation limit that can be taken into account for pre-tax contributions, added Lynn Dudley, SVP, American Benefits Council. She notes that capping itemized deductions would limit the value of tax exclusions for retirement plans and take away some tax incentive for retirement savings. Sponsors will be less willing to sponsor retirement plans if there is no benefit for themselves or participants, Holcomb added.
According to Holcomb, the argument against these ideas is that retirement-related tax expenditures do not leave the system; the government is not forfeiting taxes, it is financing money for participants. But, the government is only looking at a 10-year window, not the long term. Dudley said the argument that should be presented is that it is actually of value to the government to delay taxes because accounts grow, and more will come out of the plan than goes in. “It is an uphill effort to educate about the value of pre-tax savings,” she conceded.
The good news, according to Holcomb, is that employers are realizing the value of offering a vehicle for employees to save and are committed to retirement plans. The treatment of retirement plans will be part of overall tax reform, so employers should look at the big picture for the meaning of reforms for them and their businesses.