Benefits Council warns that taxing 401(k) contributions would lead to fewer plans

Curtailing the current tax treatment of contributions that workers and their employers make to 401(k) plans would significantly reduce employers’ willingness to sponsor plans and employees’ ability to save, according to a survey of over 500 companies by the American Benefits Institute, the education and research affiliate of the American Benefits Council.

The survey found that 91% of employers believe the exclusion of 401(k) contributions from current income taxation is important to their workers’ decision to contribute to the plan and more than seven in ten employers (72%) think their workers contribute more than they otherwise would as a result of the exclusion. “Between one-third and one-half of employers think these proposals would cause them to drop or consider dropping their 401(k) plan,” said Council President James A. Klein. “Quite remarkably, the likelihood an employer would drop or consider dropping its plan, or eliminate or reduce features like matching contributions or auto-escalation of contributions actually increases among larger employers.”

Klein said the survey demonstrates that it would be “shortsighted and ill-advised” for Congress and the president to consider generating short-term federal revenue by changing the current tax-deferred treatment of 401(k) contributions as part of a deal to avoid the fiscal cliff, or in the context of broader deficit reduction in 2013. “Retirement plan contributions are not “tax breaks” or “loopholes.” Retirees pay income tax on the benefits they receive,” noted Klein.

Source: American Benefits Council survey.

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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