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Stimulus Bill Freezes Retirement Plan Contribution Limits

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What You Need to Know

  • The freeze would take effect in 2031.
  • It is intended to reduce a tax deferment that favors the highest earners, Democrats say.
  • Retirement plan lobbyists are working to get the provision stripped from the Senate version of the bill.

[Editor's note: The day after this story was published, the American Retirement Association said it successfully lobbied to have a provision in the stimulus bill to freeze retirement plan contribution limits removed. According to the ARA, Senate Majority Leader Chuck Schumer, D-N.Y., offered a substitute amendment.]

The $1.9 trillion economic stimulus package, which passed the House on Feb. 27, freezes retirement plan contribution limits starting in 2031.

The bill, H.R. 1319, the American Rescue Plan Act of 2021, would freeze the annual cost-of-living adjustments for overall contributions to defined contribution plans and for the maximum annual benefit under a defined benefit plan.

The measure would be effective for calendar years beginning after Dec. 31, 2030, “[i]n what can only be called a budget gimmick,” said Brian Graff, president and CEO of the American Retirement Association, a lobbying group, in a recent LinkedIn post.

Added Graff: “Fortunately, we have an opportunity to fix this in the Senate and we are working hard to try and get this misguided provision eliminated.”

Senate Majority Leader Chuck Schumer, D-N.Y., said Wednesday afternoon that the Senate would move “as early as tonight” to take up the American Rescue Plan.

Brad Campbell, partner at Faegre Drinker in Washington, said Wednesday in an email to ThinkAdvisor that “freezing the limits is bad policy in that it prevents many Americans, including many small business owners, from being able to save enough for retirement as inflation erodes the value of savings. It is an unfortunate reality of the Congressional process for tax legislation that so-called ‘revenue raisers’ often target the retirement system.”

ERISA attorney Fred Reish of Faegre Drinker explains that as to 401(k) plans, under current law, “the Internal Revenue Code section 415, the deferrals, company contributions and matching contributions for an individual are limited to $58,000 in 2021.”

“But that limit increases every year due to cost-of-living adjustments. However the Budget Reconciliation bill proposes to eliminate those cost-of-living increases for years after 2030. The concept is that change will reduce tax deductions in the future, saving money for the government to offset other expenditures in the bill,” Reish explained. “However, that change would not apply to collectively bargained plans.”

More Thoughts on the Limits

Andrew Biggs, Resident Scholar at the conservative-leaning American Enterprise Institute, told ThinkAdvisor Wednesday in an email that “the Democrats’ rationale for limiting retirement account contributions is that the tax treatment of these accounts favors the rich (it does, though much less than you’d think because it’s only a tax deferment — the rich will pay taxes when they withdraw the money).”

Limiting retirement account contributions “would raise tax revenues in the short term, since less income receives the deferment,” Biggs added. “This might be as an offset to the cost of the multiemployer pension bailout. But limiting contributions would lower tax revenues in the future. Overall I don’t think it’s great policy, though not the worst thing possible since it mostly affects high earners.”

Over time, the provision will “cap the contributions and benefits of highly compensated employees, including, for example, successful owners of closely held and family business, as well as executives and professionals,” Reish said. “The risk is that the change could reduce the attractiveness of setting up plans for smaller firms.”

However, he continued, “that limit is not imposed on Taft-Hartley negotiated union-management plans, allowing higher compensated employees in those plans to have higher benefits as inflation increases take hold.”

See: Senate Removes Cap on Retirement Plan Contribution Limits From Stimulus Bill 

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