The rancorous partisan discussions in Washington aimed at
avoiding the fiscal cliff on January 1 may inadvertently target
some of the tax preferences that support employer-sponsored
retirement plans. Employers and their lobbying arms in
Washington are sounding the alarm in an effort to forestall any
move that could harm retirement plans and savings
I hear a lot of concern being expressed by plan
sponsors, says Alison Borland, retirement solutions and
strategies leader for Aon Hewitt, based in Lincolnshire,
Illinois. Theres a tremendous amount of support for
the retirement system. Employers appreciate the ability to have
the flexibility to design and construct something that will
make a possible difference for their employees when they
retire, she adds.
The fear by employers is that any limits on the
deductibility of contributions to retirement plans by employers
and employees that might be a part of resolving the fiscal
cliff or even in broader tax reform next year would hinder the
ability of todays employees to attain retirement security
for the future. When they look at the savings behavior
today, they believe more savings is needed, not less,
Borland says. Limiting tax preferences would instead reduce
savings, she adds.
If no agreement is reached by January 1 between the
Republican speaker of the house and the Democratic president,
then tax cuts adopted by Congress during the early years of
first Bush Administration, which were extended last year, will
expire. A partial payroll tax holiday passed last year and
backed by President Obama would also expire.
In addition, spending cuts in a sequestration agreement
hammered out in August 2011 in the Budget Control Act will kick
in with the expiring tax cuts, as well as new taxes from the
Patient Protection and Affordable Care Act, to reduce the
nations budget deficit next year by $560 billion,
according to the Congressional Budget Office. The resulting
fiscal shock is likely push the economy back into recession,
CBO says. Limits on tax preferences for employer-sponsored
plans surfaced in the Simpson-Bowles National Commission on
Fiscal Responsibility and Reforms deficit reduction plan
in late 2010 and in President Obamas proposed federal
budget last February, as well as in various deficit-reduction
proposals from public policy think tanks.
Various proposals being bandied about in Washington would
either cap employee and/or employer contributions to retirement
plans or more broadly put a cap on the total
amount of deductions individuals can claim, either for higher
income earners or for all tax filers.
The tax code contains a host of provisions that support
defined contribution and defined benefit plans, as well as
individual savings. Together, these benefits represent one of
the largest pools of funds that Washington budget scorers call
tax expenditures, representing funds that are not
taxed as income.
In the current fiscal year of 2013, which began in October,
employer-sponsored retirement plans are expected to represent
$147 billion in tax expenditures, according to estimates by the
Joint Tax Committee in Congress. In addition, a budget category
that covers the value of other employee benefits, such as
workers compensation, disability, personal injury and
sick pay, represents another $10.6 billion in tax expenditures.
Individual retirement arrangements (IRAs) in all their forms
add another $19.2 billion to the tally.
To be sure, no one has publicly targeted any specific
retirement plan tax preferences to avoid the fiscal cliff. Even
so, they are on the negotiating table. They are on the
table because everything is on the table, explains Geoff
Manville, principal, government relations for Mercer in
Washington, D.C. The sheer size of the tax incentives for
retirement savings makes them a target, he explains.
In spite of years of telling members of Congress how
valuable these tax incentives are and often getting promises to
keep or expand those incentives from influential politicians,
advocates have learned from past experience that retirement
plan tax preferences can quickly and unexpectedly end up on the
Any time in history when theyve looked to cut
the deficit, oftentimes the retirement system is used as a
piggy bank for other things, explains Brian Graff,
executive director and chief executive officer of the American
Society of Pension Professional and Actuaries (ASPPA), in
Arlington, Virginia. Its robbing Peter to pay
Paul, he adds.
Graff cites as an example the Tax Reform Act of 1986, which
reduced limits on contributions to 401(k) plans by 70 percent.
That led literally to ten thousands of 401(k) plans being
terminated, Graff says.
There may be a temptation for budget negotiators to limit
the deductibility of contributions for business owners and
higher income executives, Graff says. Tax preferences for
401(k) plans, however, are shared with employees under
nondiscrimination rules, he points out. If you reduce the
incentives to small business owners, it doesnt make sense
to have the plan any more, he warns.
ASPPA on November 28 launched a grassroots campaign called
Save My 401(k) urging more than 60 million
participants in 401(k) plans to tell Congress to say no to any
cuts in tax preferences for retirement plans.
Worry centers around the fact that an adverse outcome
is so difficult to anticipate and can be so potentially
harmful. Experience tells me that some things often
happen suddenly at the end [of a budget process] and sometimes
in surprising ways, says Alan Glickstein, senior
retirement consultant at Towers Watson in Dallas. Some
things happen that are intended and some things happen that
have unintended consequences.
So its not surprising that advocates for
employer-sponsored plans have fanned out across Washington and
are restating with added urgency their opposition to any tax
revenues gained at the expense of retirement plans.
We appreciate that Congress faces a lot of tough
choices, but not all tax expenditures are created equal,
says Jim Klein, president of the American Benefits Council.
Retirement plans do not represent tax breaks and they are
not a tax loophole. It is deferred tax revenue that retirees
pay when their benefits are paid out in retirement, he
Under budget scoring, the time horizon for measuring tax
expenditures and other budget categories is only 10 years, so
the future income from retirement saving does not show up to
offset the losses to tax revenues today when they are
scored as a tax expenditure.
A lot of tax and revenue discussions are really a
finely structured game that has a limited connection to the
reality of the situation, says David John, senior
research fellow in retirement security and financial
institutions at the Heritage Foundation. The very
artificial construction for 10-year time frame is one of
those disconnects, he adds. So you look at scoring over a
particular period and if you dont get the right scoring
of that particular period, then something is open to being
Advocates for participants are also worried about reducing
tax breaks for retirement plans. We dont think they
should be eliminated and used for general deficit
reduction, says Karen Friedman, executive vice president
and policy director at Pension Rights Center. Instead, Friedman
would like to see a portion of those tax preferences redirected
from benefiting high earners to be used for refundable savings
credits for new retirement savings vehicles that could
expand both coverage and also increase savings for low- and
The defenders of the retirement system tend to agree that
decisions on taxes affecting retirement plans should be decided
on the basis of what constitutes good national retirement
policy and not on the basis of tax and budget policy.