Tax Reforms to Loom Over 401(k)s in 2013

As government looks for budget solutions, defined contribution tax breaks fall in the crosshairs.

LAS VEGAS—The tax advantages of defined contribution plans, estimated to defer tax revenues by $50 billion to $60 billion a year, will be one of Congress’ sticking points in the coming year. That was the prognostication of the keynote address “From the Hill to the Summit” session of the National Association of Plan Advisors/American Association of Pension Providers and Actuaries (NAPA/ASPPA) 401(k) Summit conference here Sunday.

“Facing difficult tradeoffs—between cutting food stamps or Medicaid, versus cutting 401(k) tax advantages—will come up over and over and over,” said Brian H. Graff, chief executive of ASPPA. “There just isn’t enough money there [in the U.S. budget]. For the White House and Congress, it is not about policy. They are looking for money, and we have been the unfortunate piggy bank of many initiatives. We have to keep the drumbeat for the ‘Save My 401(k)’ campaign going.”

That is why Congress needs to hear about the importance of tax break incentives on the nation’s retirement savings pool from retirement plan advisers, said a high-level Congressional staffer who appeared on the panel, but who asked not to be named. “Congress needs to hear from people on the ground on how policy affects everyday people,” the staffer said.

The issue will come to a head by April 15, when Congress must pass a new budget or face the penalty of withheld pay for members of Congress, the staffer said. The House of Representatives, controlled by a Republican majority, is looking to create $1 trillion in new revenue through budget cuts and the elimination of tax cuts, he said. The Senate, with a majority of Democrats, is seeking only budget cuts, he said.

“When the debt ceiling expires at the end of May, we don’t know what the House of Representatives will want,” Graff said. “The real question will be whether there will be a balance of cuts and tax reform. The House Ways and Means Committee is dead set on tax reform. The House wants to eliminate deductions and lower tax rates. Are we in that mix? We are different. We are a deferral—not a deduction. And we have the non-discrimination test.”



But as Congress views the problem, the Congressional staffer said, “it is a mathematical problem,” not a question of resolving the nation’s retirement crisis. “The money has to come from somewhere.” Graff added that the areas most in danger of being cut are mortgage deductions, charitable donations and qualified retirement plans. “We are not out of the woods,” Graff said. Congress is “looking for revenue—and we are part of that conversation.”

It is up to the retirement plan adviser community to educate Congress on the fact that the tax benefits of qualified plans do not flow only to higher-income individuals but to the broader worker base, the Congressional staffer said.

Another pressing issue on the legislative front is an expanded definition of what it means to be a fiduciary, the two general session speakers said. “The Department of Labor’s (DOL) focus is more on compensation and perceived abuses,” Graff said. The problem with the proposal is that it “would mandate how people do business and preclude them from having different business models,” he said.

The DOL’s intent, however, the Congressional staffer said, is to make transparent the fees paid to fiduciaries, while eliminating conflicts of interest and ensuring that advice is reliable. However, it is possible that the government will back off the new fiduciary definition, the staffer said.

“At the end of the day, if the new fiduciary rule precludes certain business models or rollovers into individual retirement accounts (IRAs), DOL could drop the rule,” the staffer said.

The third pressing issue in Washington that could impact the retirement industry in 2013 is a proposal by Senator Tom Harkin (D-Iowa) to include mandatory retirement income provisions in defined contribution plans, the speakers said. “The retirement income product would shift longevity risk to a larger group of people,” the staffer said. Along with this, Harkin wants to work on three measures:


  • Improve Social Security
  • Continue to work on strengthening 401(k)s
  • Rebuild traditional pensions


“These ideas express a lack of satisfaction in the current system,” Graff said. “There are concerns about access and coverage, and creating a lifetime income that would effectively provide a paycheck for life.”