Capping Tax Preferred 401(k) Contributions Helps No One, Says EBRI

The Employee Benefit Research Institute (EBRI) found that the proposed tax reform regarding 401(k)-type retirement plans from the National Commission on Fiscal Responsibility and Reform would hurt both the highest- and lowest-income workers.
EBRI’s research finds the Commission’s recommendation to cap the annual tax preferred contributions to either $20,000 or 20% of income (whichever is lower) for 401(k)-type plans – referred to as the “20/20” cap – would most affect the highest-income workers—not surprising, since those with high income tend to save the most in these kinds of retirement plans. However, EBRI also found the cap would cause a big reduction in retirement savings by the lowest-income workers as well.

The analysis finds that for each age group (except for the oldest), the lowest-income group has the second-highest average percentage reductions in 401(k) contributions. Primarily, this is because their current or expected future contributions would exceed 20% of compensation when combined with employer contributions.

“Phrased another way, the 20/20 cap would, as expected, most affect the highest-income workers, but it also would cause a very big reduction in retirement accumulations for the lowest-income workers,” said Jack VanDerhei, EBRI research director.

Currently, the combination of both worker and employer 401(k) contributions is the lesser of a dollar limit of at least $49,000 per year, or 100% of an employee’s compensation.

The results are from EBRI’s Retirement Security Project Model and are published in the July 2011 EBRI Notes, “Capping Tax-Preferred Retirement Contributions: Preliminary Evidence of the Impact of the National Commission on Fiscal Responsibility and Reform Recommendations,” available online at The analysis breaks down results by age group and by relative income group.