401(k) Tax Reform Could Hurt Small Businesses

Congress is eyeing small-business retirement plans as it casts about for solutions to its deficit and budget problems, and the Senate Finance Committee is now hearing proposals on …

Congress is eyeing small-business retirement plans as it casts about for solutions to its deficit and budget problems, and the Senate Finance Committee is now hearing proposals on tax reform that may impact the tax incentives that make it possible for small businesses to offer their employees 401(k) packages. Experts believe the changes could decrease or eliminate incentives altogether, which would force many small businesses to drop their retirement plans. This would make them less competitive in attracting talent that will be likely be picked up by larger corporations, thereby further squeezing out the American small-business owner. For more on this continue reading the following article from The Street.

Small-business owners are likely to kick employee retirement plans to the curb if Congress significantly alters the tax-deferral status or contribution limits of defined-contribution plans.

Congress is looking to make big changes to the U.S. retirement system, with members saying they want to improve the efficiency of the plans and reduce the deficit.

The ramifications on small businesses, their owners and employees could be huge — and not in a good way.

Current tax incentives help pay for the contributions required for workers under plans’ nondiscrimination rules. "Cutting incentives for the small-business owner to be able to afford that plan … would be devastating," says Brian Graff, executive director and CEO of the American Society of Pension Professionals and Actuaries.

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In mid-September, the Senate Finance Committee held a hearing on "Tax Reform Options: Promoting Retirement Security." Among the proposals being tossed around: lowering the maximum pretax contributions for workers or repealing the tax-deductible status of contributions altogether in favor of a flat tax credit upon withdrawal.

"We would predict hundreds of thousands, literally, of small-business retirement plans would terminate," Graff says. "In today’s economic environment, with all the challenges in small business, the last thing we need to do is to make it harder for small business to offer retirement for workers, and without those plans we know those workers won’t save."

The proposals would hit small businesses especially hard, as many continue to struggle along with the economy.

According to the U.S. Census’ Survey of Business Owners, 1.04 million businesses offered contributions to employee retirement plans in 2007, the latest data available, equating to about 25% of those surveyed and roughly 64 million employees in total. About 981,181 of firms with fewer than 100 employees offered retirement contributions, according to Census data, suggesting about 13 million employees could be affected.

As with large companies, tax incentives for small-business owners encourage them to put plans in place for their workers. With those incentives lowered or possibly taken away altogether, it’s less economical for small-business owners to offer the plans.

That puts at stake the ability to stay competitive against larger companies in attracting talent.

Many small businesses, especially those in high-growth industries such as technology, are competing for engineers, Web developers, social media experts and others. Offering competitive salaries is already often difficult, but take away the incentive to offer good retirement plans and small businesses are torn. Keeping the plans will cost them; losing them puts them at an additional competitive disadvantage.

This article was republished with permission from The Street.


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