Trade groups representing plan sponsors have snubbed a proposal floated by President Joe Biden to give individuals across all pay grades equal tax advantages for their retirement savings.
The proposal calls for replacing the current upfront tax break that savers now receive for money they put into their retirement accounts with a flat, refundable tax credit of 26%. The administration's rationale for the proposed shift is that it would be more equitable to lower- and middle-income earners who under the current system receive less of a tax benefit than high-income earners.
Under the current system, for example, a low-income earner in the 12% tax bracket who contributes $1,000 to his or her retirement account would defer paying $120 in taxes, whereas a higher-income earner in the 37% bracket would defer $370, or more than three times as much.
"It doesn't make any sense to make the incentive for saving $1,000 bigger for higher-income people than for smaller-income people," said Alicia Munnell, director of the Center for Retirement Research at Boston College.
Under Mr. Biden's proposal, all savers — regardless of their income level — would receive the same 26% credit for whatever dollar amount they contributed to their retirement accounts that year.
In other words, everyone would get the same $260 credit for their $1,000 contribution, which would be subtracted from any taxes they owe Uncle Sam.
While Mr. Biden hasn't issued a formal proposal, speaking about it only in general terms during his election campaign, plan sponsors have already indicated dismay at an idea they believe will disrupt the current 401(k) savings system, which they see as working fairly well. Plan sponsors fear the change will lead to a drop in retirement savings and require a huge effort to re-educate the workforce about how the new tax incentive would work.
The White House press office did not respond to an email request seeking comment and additional details on the proposal.