ATLANTA (May 17, 2012)–Pension professionals expect Congress to look to retirement plan funds and IRAs for potential sources of additional revenue for the federal government in the next year. Retirement professionals know that retirement funds will eventually be taxed when individuals take the funds in retirement, but the federal government’s method of accounting makes retirement savings look significantly more expensive to the government.
Debra Davis, ASPPA assistant general counsel and director of government affairs, and other pension professionals believe Congress will consider changing the limits on contributions that can be made to retirement plans. Davis, IRS officials, and other pension professionals spoke at the Benefits Conference of the South in Atlanta on May 17. The IRS and the American Society of Pension Professionals & Actuaries (ASPPA), jointly sponsor the conference each year to educate retirement plan professionals from around the region on industry trends and law changes.
“It shouldn’t come as a surprise if Congress looks at the retirement plans we work with as they have done in the past,” said Andrew Zuckerman, director of the IRS’s Employee Plans Rulings & Agreements.
When members of Congress try to find additional revenue sources, the employer-based retirement system is a prime target. However, if lawmakers eliminate all the tax deferral advantages that encourage employers and employees to sock money away in retirement plans, that would undermine the private-sector, employer-based retirement system. So if Congress takes any action to generate new revenue from the retirement plan system, it likely will do so by reducing various contribution limits.
“Because it is difficult to tax retirement plans directly, in the past Congress has raised revenues from these plans by reducing amounts that can be contributed and deducted,” Zuckerman said.
For example, if Congress lowers the maximum amount an individual can contribute to a 401(k) plan for future years, then taxpayers who contribute the maximum amount each year will be forced to contribute less to their 401(k) plans and to report more income for tax purposes in the year it is earned. For 2012, the maximum contribution limit is $17,000 ($22,500 for individuals age 50 and older).
The Congressional Budget Office has already issued a proposal to eliminate all catch-up contributions for individuals age 50 and older and to reduce the 401(k) deferral limit to $14,850, according to Davis. The catch-up contribution allows taxpayers at least 50 years old to contribute to 401(k) plans an additional $5,500 above the $17,000 deferral limit, which is why such individuals can contribute $22,500 in 2012.
ASPPA and its members are working to educate Congress and the public that the tax incentives used to encourage U.S. employers and workers to contribute to retirement plans are not as expensive as they appear. Congress’s Joint Committee on Taxation compares the “tax expenditures” of the federal tax laws created by various tax exclusions, exemptions, deductions, credits and deferrals. A January report prepared by Joint Committee staff estimated “tax expenditures” for 2012 for the following tax-advantaged programs:
• Employer-provided health exclusion $128 billion
• Home-mortgage deduction $84 billion
• Employer-provided retirement plans $123 billion
Because Congress wants to reduce the federal budget deficit and find new sources of revenue, the “tax expenditures” created by deferred taxation on retirement plan contributions make an attractive target. However, the Joint Tax Committee’s method of calculating “tax expenditures” for tax-advantaged programs does not consider that taxpayers will pay taxes to the government on retirement funds during retirement and, therefore, the report does not provide an appropriate basis for comparison, Davis said. While the health exclusion and the mortgage deduction exempt income from taxation, the retirement tax merely defers taxation for a number of years.
The reports provided to lawmakers can mislead them because the federal budgeting process only looks 10 years out. Because retirement plan deferrals can extend 30 years or more, the projected collection of the tax is outside the 10-year window and does not get reported in the estimates of tax revenue projected from various sources. Thus, in these reports, the deferrals into retirement plans appear more expensive because they do not include all of the money that retirees will pay as income taxes on their benefits in their retirement years, according to Davis.
If Congress changes various contribution limits, employers will likely be required to modify their retirement plan documents, Zuckerman said.
When contribution limits change, the cost of compliance efforts goes up. Retirement plan professionals must revise retirement plan documents for employers and change recordkeeping systems to enforce new limits. Company officers, and sometimes the board of directors, must approve changes to plan documents. Employers and retirement professionals must educate employees on the new limits and monitor contributions to ensure the new limits are not exceeded.
Such law changes also require additional work for the IRS, which must update guidance and monitor retirement plan documents for the new limits in both its voluntary documentation approval programs and in audits performed by its enforcement arm.
Zuckerman did not address these costs specifically, but he told conference attendees that the IRS, like other federal agencies, has been subject to agency-wide budget cuts. In such an atmosphere, it is more difficult to justify hiring new staff to handle a growing workload or to introduce new compliance programs that employers and retirement plan professionals have requested without cutting other programs.
Co-chair Benefits Conference of the South
Attorney, Ferenczy + Paul LLP
ASPPA Member since 2009
Category: Member Focus