SURVEY SAYS: Thoughts About Tax Reform Proposals?

March 10, 2014 (PLANSPONSOR.com) – At the end of February, U.S. House Ways and Means Committee Chairman Dave Camp introduced a sweeping tax reform bill that has many in the retirement industry alarmed about its proposals concerning retirement plans.
By PS

See “Industry Groups Raising Alarms About Tax Reform”  

Last week, I asked NewsDash readers if they think the retirement-plan related proposals will hurt, help or not affect Americans retirement savings.

Responses were as follows:

  • Maximum contribution limits frozen for 10 years – 77.8% said this will hurt American’s retirement savings, 0% said it will help, 20% said it will neither help nor hurt, and 2.2% said they don’t know;
  • Deferrals greater than 50% of statutory limits would be taxed up front (contributed on a Roth, or after-tax, basis) – 73.3% selected “hurt,” 4.4% chose “help,” 15.6% selected “neither” and 6.7% said they don’t know;
  • Requirement that employers with more than 100 employees allow Roth deferrals into their retirement plans – 22.2% chose “hurt,” 28.9% “help,” 42.2% “neither” and 6.7% “don’t know”;
  • A cap of 25% on the rate at which deferrals would reduce a participant’s income – 75.6% “hurt,” 0% “help,” 15.6% “neither” and 8.9% don’t know; and
  • Elimination of new Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLE plans) – 55.6% “hurt,” 4.4% “help,” 8.9% “neither” and 31.1% don’t know.

 

I also asked responding readers how they think the tax reform proposals will affect employer decisions to offer retirement plans to employees.

Responses were:

  • Maximum contribution limits frozen for 10 years – 42.2% said this will hurt American’s retirement savings, 0% said it will help, 55.6% said it will neither help nor hurt, and 2.2% said they don’t know;
  • Deferrals greater than 50% of statutory limits would be taxed up front (contributed on a Roth, or after-tax, basis) – 57.8%% selected “hurt,” 2.2% chose “help,” 40% selected “neither” and 0% said they don’t know;
  • Requirement that employers with more than 100 employees allow Roth deferrals into their retirement plans – 55.6% chose “hurt,” 2.2% “help,” 37.8% “neither” and 4.4% “don’t know”;
  • A cap of 25% on the rate at which deferrals would reduce a participant’s income – 51.1% “hurt,” 0% “help,” 46.7% “neither” and 2.2% don’t know; and
  • Elimination of new Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLE plans) – 68.2% “hurt,” 0% “help,” 15.9% “neither” and 15.9% don’t know.

 

Verbatim comments just reiterated responding readers negative views of the tax reform proposals, though one reader expressed with certainty the proposals will not pass. Readers making verbatim comments spoke of administrative burdens on employers and mentioned other provisions in the tax reform proposal that could hurt or help Americans. Editor’s Choice goes to the reader who said: “Once again someone with no experience administering a retirement plan is trying to create rules to change them. We need to elect Brian Graff as president!”

Thanks to everyone who participate in our survey!

Verbatim

Retirement changes in this proposal are not as damaging to most middle class Americans as other elements of the proposal (significant changes to mortgage interest and charitable contribution itemized deductions).

Once again in the interest of "tax reform" and "fairness" the administration and Congress will shift compliance costs onto employers while effectively limiting the ability of employee's to save for retirement. As an employer we will continue to respond by modifying our plans to conform to these new rules in order to maintain an effective benefit offering to our staff. But the costs of doing this, essentially unproductive task, will take away our ability to make an alternative productive investment in people, product or technology. This administration and Congress just does not get it.

Any proposal that limits the maximum deferral that a participant can make is mostly going to affect top-paid employees who are likely to be in the HCE group and won't affect the vast majority who can't afford the maximums anyway. This type of proposal should also eliminate the nondiscrimination testing, because in our house, the HCEs can't contribute the maximum anyway due to excess contributions having to be returned. It's a double whammy for them, and an administrative burden for the employer. $17,500 is not much to a HCE and is limiting enough without further reducing it by subjecting it to the ADP test. For most NHCEs, $17,500 is completely out of reach, so these proposed maximums would not have much effect on them.

Once again someone with no experience administering a retirement plan is trying to create rules to change them. We need to elect Brian Graff as president!

It's backwards to develop tax policy before addressing the best way to bring more retirement security to a greater number of Americans.

Appalling but typical. The government continues to refuse to clean up its own disaster and has found yet another way to make us pay for their irresponsibility by funding taxes now, and ignoring the problem that continues to grow bigger by the second. What happens in 10 years? Oh and then that same government has already robbed social security (an action by the way that any business would be prosecuted for) so there will be little left for people in the future and at the same time they're now going to make sure no one can accumulate enough money to take care of themselves independently. Does ANYONE in D.C. have any brain at all? Never mind - the answer is painfully evident.

We keep talking about the retirement crisis, and that people don't have enough retirement savings in their retirement years - yet reducing the amount that people can save (or the tax benefit thereof) is inconsistent with the message that people need to save more for retirement. If people had their own retirement savings, they wouldn't be as big of a tax burden on society by relying on government assistance.

Capping retirement savings is a bad idea no matter how it's presented. There is no shortage of predictions that people aren't ready for retirement or that Social Security won't be there or will be severely reduced. How does it make any sense to restrict people who are willing to do so from saving for retirement on a tax favored basis. Those people will be better prepared and hopefully reduce the cost to support them in old age because savings were not adequate. This is short sited.

Geez....it is hard enough to convince American's that retirement saving is important! Let's concentrate on really important issues...like educating our children so they can become better saver's...and hopefully...politicians who have a freakin' clue!

Verbatim (cont.)

When employers are trying to encourage employees to save more for retirement, this proposal will only hurt those efforts. It is a shame that the people who make these proposals are not "down in the trenches" with employers and employees who are trying to plan for a financially sound future.

None of these are going to pass.

Anything that prevents a small business owner from maximizing deductions will result in substantial numbers of plan terminations. These people can save on their own without the costs and hassle of establishing and maintaining a qualified plan; it's their employees who will lose out by the loss of employer matching and profit sharing contributions.

We just implemented a Roth and it required quite a bit of work and cost independent of our employees' time. These proposals make every plan (expect those of the smallest employers) adopt a Roth and every employer reengineer their plan. How much more tax limbo do we have to play before we just raise rates to where we need them?

I like the idea of individual taxes falling into three brackets, 10%, 25%, and 35%. It's simple and it's more equitable for everyone. I feel any limitation on how much Americans can save is insane. With Social Security changing in some form in the future (reduction of benefits I assume), who is going to take care of Americans at retirement? I work hard all my life and save as much as I can so I can take care of myself when I can no longer work. That's what I teach my participants. These kinds of limitations will only hurt employees in the long run. As usual, Congress only focuses on the present. They don't have the same financial worries in retirement that the rest of Americans have.

There is a real CRISIS facing Americans who are not saving for retirement. Congress continues to make employer sponsored plans more complicated and harder to administer. This is a problem especially for small businesses who do not have the expertise on staff. Every incentive possible should be given to people to save money. If we are not careful, we are going to end up with a lot of aged people who have run out of money and then are dependent upon Medicaid - another program in severe danger.

To use an all too familiar expression "what difference does it make", when there is no reform in reform. Tax is tax is tax no matter how you color it. Camp has forfeited the privilege of calling himself a Michigander. (if you're not from Michigan you don't get it, of course)

'limits", "elimination", "taxed", "requirement" - one need only look at the items listed in the survey to intuit just exactly what the impact on retirement savings would likely be. Some would hurt more than others, of course, but it's hard to see how this "tax reform" proposal helps retirement savings. On the other hand, encouraging/forcing folks to pay their taxes now is perhaps a great move toward assisting long-term retirement security, considering where the tax rates are likely headed in the future. You could argue that Camp's proposal represents a fundamental shift in the "put off paying taxes now" philosophy that has long been a foundation of the 401(k) education message. Or you could just look at the White House budget proposal and say "better get those taxes paid now, ‘cause it's going to be murderously expensive to live here in the future." We can only hope that that future government doesn't decide that it needs to tax the accumulated savings of those who have done the right thing(s) to as some kind of "shared responsibility" transfer to those who haven't....

What has to be understood is that this is NOT a retirement savings proposal, but a TAX REFORM proposal. It uses the projected (and they are by no means certain) "savings" from changes like those outlined above to pay for its real purpose - to modify the overall tax rates. We've seen this kind of thing before (TRA86), so it's easy to imagine how it will affect the balances of those who decide to offer these plans; they'll be less important, less likely to be funded with current matches, and less likely to be offered. And the well-off will be (even) better off. For an interesting analysis of how this kind of thing could work, check out http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=5252  

 

NOTE: Responses reflect the opinions of individual readers and not the stance of Asset International or its affiliates.

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