Pension plan tax breaks facing challenge

Corporate pension industry lobbyists are bracing for an attack on the tax breaks for pension plans as the White House and federal lawmakers struggle to slash the federal budget deficit.

The opening salvo on the retirement plan tax deferrals is expected to come from the White House's National Commission on Fiscal Responsibility and Reform, lobbyists for corporate pension plans said. The bipartisan commission is supposed to issue a report by Dec. 1 on ways to bring the federal budget under control.

Lobbyists are concerned that the tax breaks for contributions to defined benefit and defined contribution plans could wind up on the chopping block because together they are expected to account for $111.7 billion in tax revenue losses to the U.S. Treasury during fiscal 2011, according to President Barack Obama's proposed budget. The revenue loss from the tax deferrals on contributions to 401(k) and other defined contribution plans is expected to amount to $67.1 billion during the fiscal year, which started Oct. 1, while forgone revenue from defined benefit plans is expected to amount to $44.6 billion during the same year, according to the budget.

Projected tax losses associated with retirement plans are second only to the $177 billion attributable to exclusions for medical care, according to Mr. Obama's budget.

Adding to the concerns of pension industry lobbyists is that many Republicans — who took control of the House and dramatically improved their Senate minority margin in the Nov. 2 election — ran on a platform that included bringing the federal budget to heel.

“The great danger to pensions is going to be deficit reduction,” said Mark Ugoretz, president of the ERISA Industry Committee, Washington, in an interview. “Lawmakers are going to be looking at the extent to which they can curtail the contribution limits. Everything is on the table.”

Added James Klein, president of the American Benefits Council: “As Congress looks to address the deficit, the fact that pensions represent the second-largest tax expenditure in the budget makes them vulnerable.”

The annual cap for participants on tax-deferred contributions to 401(k), 403(b) and 457 plans is currently $16,500, with those 50 or older able to contribute an additional $5,500.

The existing maximum benefit from a defined benefit plan is $195,000 a year. Reducing the benefit would decrease the amount of tax-preferred contributions an employer can make to the plan.

Critics argue that existing DC plan contribution caps should be rolled back because they favor wealthier employees.

“About two-thirds of the tax breaks for contributions to 401(k) plans go to taxpayers in the top 20% of the income distribution,” said Monique Morrissey, an economist for the Economic Policy Institute, Washington. “There's no reason to subsidize contributions of $16,500 because few households can afford to contribute this much and high-income households by and large aren't saving more because of these tax breaks but are simply shifting savings to tax-favored accounts,” she added.

“If you're going to look at tax subsidies, why not look at the best and fairest way to provide adequate benefits to everybody?” asked Karen Friedman, executive vice president and policy director for the Pension Rights Center, Washington.

Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School, New York, said: “I would roll back the cap to about $5,000 and then redistribute the savings to workers without pensions in the form of a tax credit of $600, and that would be revenue neutral. It would be a lot fairer and would expand pensions to more than 60 million people who currently don't have pensions.”

Still, others are concerned that reducing the tax incentives for plans will undermine plan support by company executives — who benefit from higher contribution and benefit caps.

“There's already concern that companies may become less interested in tax-qualified retirement plans because of limited benefits to higher-paid employees of the company,” said Andrew Oringer, an ERISA attorney with the law firm Ropes & Gray LLP, New York. “Lowering the caps could exacerbate those concerns.”

“In the past, when they have lowered the limits for DB plans, it has reduced support for these plans by corporate decision-makers,” added Judy Schub, managing director of the Committee on Investment of Employee Benefit Assets, Bethesda, Md.

Among the options the Obama administration's fiscal commission is considering are zeroing out or paring existing tax breaks for contributions to corporate defined benefit and defined contribution retirement plans, confirmed a senior commission official, who asked not to be identified.

But the potential changes, which were not detailed in a draft of recommendations released Nov. 10 by the commission's co-chairmen — Alan Simpson, former Wyoming Republican senator, and Erskine Bowles, who served as chief of staff to President Bill Clinton — have yet to be determined by the 18 commissioners, the official said.

Leading House Republicans were holding their pension cards close to the vest. Rep. John Boehner, R-Ohio, who is expected to become speaker of the House in January, had no comment, said Michael Steel, spokesman for the lawmaker.

“At this point, it's too soon to speculate on any specific policy changes,” said Alexa Marrero, a spokeswoman for Rep. John Kline, R-Minn., who is in line to become chairman of the influential House Education and Labor Committee.

Some pension industry lobbyists are predicting that any legislation to roll back the caps on plan contributions would be blocked by the new House Republican majority, in part because the higher-income individuals that benefit from the existing caps include GOP campaign donors.

“Republican control of the House is going to prevent any further discussion of reducing the tax expenditures for retirement savings,” said Bradford P. Campbell, former assistant secretary of labor for the Employee Benefits Security Administration and now of counsel to the law firm Schiff Hardin LLP, Washington. “There is still a very strong belief among Republicans that reducing taxes spurs economic growth.”

Not everyone agrees. Said Ms. Ghilarducci: “Republicans are going to scrutinize the tax breaks ... and will consider rolling them back.”

Said Brian H. Graff, executive director of the American Society of Pension Professionals and Actuaries, Arlington, Va.: “I agree that this (rolling back the caps) could be an issue, but I am confident we will be able to demonstrate the importance of keeping current levels of retirement savings.” n