As interest in potential corporate and individual tax cuts continues to grow, retirement plan sponsors worry this may lead to legislation requiring employee contributions in workplace retirement plans to be made after-tax, in order to counterbalance tax cuts—a mandate that in turn, could impact plan participation and participant deferral rates.
The Employee Benefit Research Institute (EBRI) has released its most current information as to probable effects of the Rothification proposals now under debate.
According to the release, some tax reform packages might include a “mandatory, partial Rothification” rule, whereby 401(k) employee contributions up to $2,400 annually can be made either pre-tax or Roth—after-tax—depending on plan design and employee choice; those over $2,400 would be treated on a Roth basis. Employee contributions made pre-tax, as well as ensuing investment returns, would, as now, be taxable on subsequent distribution, and employee contributions made on a Roth basis, including their investment returns, would not.
Using its numbers from year-end 2015—i.e., its latest, from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project—EBRI breaks down the percentages of 401(k) contributors, and their contributions, that the $2,400 threshold would affect, subjecting the contributions to tax.
For those at the lowest wage level—$10,000 through $24,999—38% would be affected. Of those making $25,000 through $49,999, slightly fewer, 32%, would be affected, whereas in the $50,000 and up ranges, sharp increases would occur. The affected group grows to 60% for workers making $50,000 through $74,999 and to 76% for the $75,000 through $99,999 wage group. Eighty-seven percent of 401(k) contributors who make over $100,000 would be affected.
As to percentages of 2015 401(k) plan contributions, 58% made by those earning $10,000 through $24,999 exceeded $2,400 and would have been subject to Rothfication—and tax. The percentage drops to 51% for the $25,000 through $49,000 earners, then increases to 58% for those in the $50,000 through $74,999 income range. Additionally, 70% of contributions for those making $75,000 through $99,999 a year and 80% for those making $100,000 or more would be affected.
EBRI further broke down, by age, how many 401(k) contributors would surpass the threshold: Forty-three percent of the youngest group—ages 25 through 34—56% of those 35 through 44, 62% of those 45 through 54, and 64% of those 55 through 64.
Slicing its data by both age and amount saved, EBRI found 53% of contributions made by the youngest employees—i.e., 25 through 34 years old—would exceed $2,400 and be “Rothified.” This number increases to 66% for employees ages 35 through 44, to 72% for those 45 through 54, and 75% for those 55 through 64.
The EBRI expects to release its complete study—conducted through the EBRI Retirement Security Projection Model—on how possible tax reform changes will affect retirement income adequacy, in an EBRI policy forum during early or mid-November. More information about this study can be found here.
« African-Americans Want More Financial Education From Their Employers