ASPPA faults report on retirement plans
By Paula Aven Gladych
A Congressional Budget Office report on tax expenditures fails to consider the impact of incentives on employer-based retirement plans.
Or so says The American Society of Pension Professionals & Actuaries.
“CBO reports that they allocate the tax incentives to those who directly benefit from them. They also note that some of the savings resulting from the tax incentives is not new savings, but savings moved from non-tax-preferred accounts,” said Judy Miller, executive director of ACOPA and director of retirement policy for the ASPPA.
“But without further comment, both of these remarks are seriously misleading when the subject is the incentive for employer-based retirement savings,” she said.
With a tax-preferred employer-sponsored retirement plan, contributions to owners and highly compensated employees can only be made if the company also makes contributions to other employees.
When a small-business owner decides to put in a workplace plan, or a larger employer puts in a plan to benefit key employees, other employees get employer contributions that they did not have before. Only a small portion of this benefit is recognized in an analysis of the distribution of the tax benefit for these employees, even though this is a very direct benefit, not an indirect impact, she said.
If an employee with a 15 percent marginal tax rate gets a $2,000 employer contribution, the "benefit" for that employee is really $2,000. What shows up in the expenditure analysis is the marginal income tax rate plus the payroll tax rate times $2,000, or roughly $600, understating the true benefit for that employee.
In addition, the owner’s tax benefit is not reduced by the portion of the current year tax savings that is transferred to employees in the form of contributions. The result: The owner’s benefit is overstated and the employee’s is understated, Miller said.
The impact of the nondiscrimination rules belongs in the discussion of whether or not new savings is created as well. An employer that “transfers” savings to a tax-favored employer-based account is creating new savings for the employees who now get contributions, regardless of whether or not there is new savings for the owner. This is precisely the result that was contemplated by incentives for employer-provided plans, but it’s not reflected in an analysis of the distribution of the tax incentive, Miller said.
ASPPA estimates that for 2012, more than 70 percent of the defined contribution tax benefit went to families earning under $150,000. Like the CBO analysis, ASPPA’s analysis does not recognize the transfer of the tax benefit from a small business owner to employees. If it did, the benefit would skew more heavily to families with more modest incomes.
The American Society of Pension Professionals & Actuaries is a national organization of more than 13,000 retirement plan and benefits professionals that serves as the educator, voice, and advocate for the employer-based retirement system.
Originally published on BenefitsPro.com