Benefits July 11, 2011
Capping Tax-Preferred 401(k) Contributions Would Hurt Workers
July 11, 2011 (PLANSPONSOR.com) - A new analysis from the nonpartisan Employee Benefit Research Institute (EBRI) finds that the National Commission on Fiscal Responsibility and Reform proposed tax reform for 401(k)-type retirement plans would cause the greatest reduction in retirement savings for both the highest- and lowest-income workers.
Reported by PLANSPONSOR staff
EBRI’s research finds the Commission’s recommendation to cap the annual tax preferred contributions to (the) lower of $20,000 or 20% of income for 401(k)-type plans (known as the “20/20” cap) starting in 2012 would most affect the highest-income workers—not surprising, since those with high income tend to save the most in these kinds of retirement plans. However, EBRI also found the cap would cause a big reduction in retirement savings by the lowest-income workers as well.
The analysis finds that for each age group (except for the oldest), the lowest-income group has the second-highest average percentage reductions in 401(k) contributions. Primarily, this is because their current or expected future contributions would exceed 20% of compensation when combined with employer contributions.
“Phrased another way, the 20/20 cap would, as expected, most affect the highest-income workers, but it also would cause a very big reduction in retirement accumulations for the lowest-income workers,” said Jack VanDerhei, EBRI research director, in a press release.
Currently, the combination of both worker and employer 401(k) contributions is the lesser of a dollar limit of at least $49,000 per year, or 100% of an employee’s compensation.
The results are from EBRI’s Retirement Security Project Model and are published in the July 2011 EBRI Notes, “Capping Tax-Preferred Retirement Contributions: Preliminary Evidence of the Impact of the National Commission on Fiscal Responsibility and Reform Recommendations,” available online at http://www.ebri.org. The analysis breaks down results by age group and by relative income group.
The analysis finds that for each age group (except for the oldest), the lowest-income group has the second-highest average percentage reductions in 401(k) contributions. Primarily, this is because their current or expected future contributions would exceed 20% of compensation when combined with employer contributions.
“Phrased another way, the 20/20 cap would, as expected, most affect the highest-income workers, but it also would cause a very big reduction in retirement accumulations for the lowest-income workers,” said Jack VanDerhei, EBRI research director, in a press release.
Currently, the combination of both worker and employer 401(k) contributions is the lesser of a dollar limit of at least $49,000 per year, or 100% of an employee’s compensation.
The results are from EBRI’s Retirement Security Project Model and are published in the July 2011 EBRI Notes, “Capping Tax-Preferred Retirement Contributions: Preliminary Evidence of the Impact of the National Commission on Fiscal Responsibility and Reform Recommendations,” available online at http://www.ebri.org. The analysis breaks down results by age group and by relative income group.