A 2011 plan to reduce the federal deficit that proposes changes in the tax treatment of employer and employee contributions to 401(k) plans could have substantial negative effects on balances in those plans, according to the Employee Benefits Research Institute (EBRI).
In the proposed plan, contributions by both employers and employees to plans would no longer be deductible, but a flat-rate refundable tax credit of 18% would be introduced instead that would serve as a federal matching contribution into a retirement savings account.
Proposals that would eliminate tax deductions for current contributions to 401(k) plans were evaluated assuming a status quo in the amounts of employer and employee contributions, EBRI said.
However, additional studies showed that would not necessarily be the case. Data from an AllianceBernstein survey of employer reactions to such a proposal, as well as data from the 2012 Retirement Confidence Survey by EBRI and Matthew Greenwald & Associates, which asked plan participants how they would react to such a proposal, revealed the potential for a substantial negative impact on employee balances.