Retirement officials are worried that Congress, in its efforts to reduce the federal deficit, will look to pilfer the tax expenditures for employer-provided retirement plans—which totaled $112 billion in fiscal year 2011, James Klein, president of the American Benefits Council, said in testimony before the House Subcommittee on Health, Employment, Labor and Pensions on Tuesday.
In its scramble to find ways to reduce the deficit, “some in Congress may overlook how these plans provide retirement savings incentives to workers at a significantly lower cost than the additional dollars needed to expand corresponding public programs,” Klein said. “Because members of the Education and Workforce Committee inherently understand the value of the employer-sponsored retirement system, you are especially well positioned to be a voice within the budget debate on the need for tax policy to support, not erode, employer plans and retirement savings.”
William Sweetnam, co-chair of Washington-based Groom Law Group's Policy and Legislation Group, who was previously the benefits tax counsel in the Office of Tax Policy at the Treasury Department, told AdvisorOne in an email message that in deciding how to close the budget deficit, “Congress will be looking at cutting all government spending–including reducing tax expenditures.” One of the biggest tax expenditures, he said, “is the current exclusion from taxable income of contributions and earnings on employer-based defined benefit pension plans and defined contribution plans”–like 401(k) plans.
“If employers don’t want to see reduced limits in the amount of contributions and benefits that can be provided under a retirement plan, they will need to make a good argument that the tax expenditure for these plans is a worthwhile government expenditure,” Sweetnam said. “One way to do that is to show how many employees will lose access to retirement plan benefits if the limits on benefits for these plans are reduced.”
Indeed Brian Graff, executive director and CEO of the American Society of Pension Professionals and Actuaries (ASPPA), says new research from the society shows that proposals to scale back or eliminate retirement savings incentives in 401(k) plans not only “endanger the ability of low- and moderate-income workers to enjoy secure retirements but are based on faulty math.”
ASPPA says its analysis shows “the real cost of retirement savings incentives to be 55% to 75% lower than claimed by budget hawks, meaning that proposed cuts will not save nearly as much as advertised even as they jeopardize the future of 401(k)s and other retirement plans.”