Plan sponsors are overwhelmingly against a tax reform package that would eliminate or reduce the tax-preferential treatment of defined-contribution retirement plans.
In a survey conducted by the Plan Sponsor Council of America, a nonprofit trade group that represents the interests of employer sponsors of workplace retirement plans, nearly 95% of the 443 sponsors who responded strongly or somewhat agree that eliminating or reducing pre-tax contributions to 401(k) plans would be a “bad idea.”
Early vows by the Trump administration to make tax reform a top priority have led to speculation that the tax treatment of workplace retirement and health care plans are negotiable as a way to pay for significant reductions in individual and corporate tax rates.
Over the past several months, proposals that would partially or completely transition the country's defined contribution system to an after-tax, or Roth-style, system have circulated on Capitol Hill. The Trump administration and the Republican Caucus in the House of Representatives have been cryptic about whether the tax treatment of defined contribution plans will be in play as comprehensive tax reform is undertaken.
The non-partisan Joint Committee on Taxation's most recent data shows the tax-preferred treatment of defined contribution plans will cost $583.6 billion in so-called foregone revenue between 2016 and 2020. Traditional IRAs will cost $85.8 billion. The JTC provides Congress research on the tax code.
Critics of proposals to use existing retirement plan tax incentives to pay for tax cuts argue they would have a negative impact on employee savings rates. They also claim some plan sponsors would be incentivized to stop offering retirement plans.
PSCA's survey, which included input from sponsors of micro- to mega-plans, shows that employers overwhelmingly agree that changing the existing tax incentives would slow deferral rates.
Almost 94% strongly agree or somewhat agree that employees would be discouraged from saving if the tax incentive to do so was eliminated or reduced.
Most sponsors said they would continue to offer plans if the existing tax-structure were changed.
Asked if they would continue to offer plans if the existing limits on pre-tax contributions were reduced, more than 85% of respondents said they would definitely or likely continue sponsoring plans. But that number drops to 70% under a hypothetical all-Roth system.
Sponsors of micro-plans were the most likely to rethink offering a savings vehicle if pre-tax contribution rates were reduced: 16% said they might continue sponsoring a plan; almost 6% said they would be unlikely to continue sponsoring a plan; and nearly 3% said they would definitely terminate their plan if pre-tax contribution limits were reduced.
The consequences become more grave under the proposal to shift all contributions to an after-tax basis: 16% of all plans said they might consider dropping their plan, with 22% of micro-plans and 13.5% of plans with more than 1,000 participants claiming they would be on the fence.
More than 5% of all plans said they would be unlikely to continue sponsoring a plan under an all-Roth requirement; and 4.4% of micro-plan sponsors said they would definitely terminate their plans.
“Plan sponsors are very concerned about the potential impact of tax reform on their employees' retirement savings,” Jack Towarnicky, PSCA's executive director, said in a statement. “These proposals could impact the more than 100 million Americans who participate in tax-qualified retirement savings plans.”
Three-fourths of respondents to the survey already offer a Roth option. Nearly nine in 10 plans with more than 5,000 participants do not offer a Roth option.
Among plans that do offer after-tax contributions, 30% of sponsors said the option is utilized by 10% to 20% of participants.
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