Small-business groups have joined the chorus of retirement professionals upset with President Barack Obama’s proposed retirement cap.
Opposition to the plan emerged almost immediately. The proposed $3 million cap on retirement savings could force small businesses to stop offering workplace retirement plans, the American Society of Pension Professionals & Actuaries said shortly after the president’s plan was unveiled earlier this month.
“Obviously it won’t hurt every small business, but there are a significant number it will hurt,” said Judy Miller, director of retirement policy at ASPPA.
In his budget blueprint, President Obama proposed a $3.4 million cap on how much money individuals can put into retirement accounts. The move would raise about $9 billion for the federal government over the next 10 years. The cap would prohibit taxpayers from taking advantage of the pre-tax deferral into their 401(k) or defined contribution pension plans after they cross that $3 million threshold, which is enough to fund a $205,000 annual annuity for a person wanting to retire at age 62.
According to data from the Employee Benefit Research Institute, a very small percentage of IRA and 401(k) investors would be affected by the cap. In 2011, only 0.06 percent of total IRA account holders had $3 million and only 0.0041 percent of 401(k) accounts had that much money in them at the end of 2012.
Still, the proposal is alarming on two levels, Miller said. Small-business owners can’t rely on so-called nonqualified deferred compensation like big companies can, so their options are limited, she said. A company-sponsored retirement plan is a small-business owner’s only way to generate tax-deferred savings, unlike executives at large companies, who can “get pretty much anything, no limit,” Miller said.
Nonqualified deferred compensation is money that workers earn in one year but that is paid out in a future year, helping to lower tax liabilities.
It makes for a very uneven playing field, Miller said. “We really count on the nondiscrimination rules related to contributions to employer-based plans,” Miller said, adding:
“You take away the incentive they previously had to make contributions to other people and you’re going to end up with a lot of people, who are not intended to be the target, losing out under this proposal.”
Paula Calimafde, chair of the Small Business Council of America, doesn’t go quite as far but is critical of other components of the proposal.
She doesn’t think that the $3 million cap will hurt the system because, mostly, such a small percentage of individuals would be affected by the cap.
The proposed cap would be preferable to proposals that came out during the fiscal cliff talks at the end of last year that would limit contributions going into a plan to the lesser of 20 percent of earnings or $20,000 per year.
That scenario would “trigger plan terminations or plans being frozen in the small-business sector because with the small-business sector, what makes the retirement plan system work is tax incentives,” she said. “If they are not strong enough to carry the weight of the internal administrative burdens and the cost of running a plan, including the cost of contributions for non-highly compensated employees, the owners will walk away from it.”
She added small business owners are more willing to sponsor a retirement plan and give employee matches or offer profit sharing if they have incentives to do so.
Calimafde pointed out that changes made to the tax incentives in the 1980s forced many small business owners to close or freeze their workplace retirement plans.