Looming Large: What a Biden Presidency Could Mean to The Retirement Plan Landscape

By Katharine Finley, Senior Compliance Counsel, and Anne Tyler Hall, Principal, Hall Benefits Law

With the presidential election approaching quickly, many employers are interested in the impact to benefits in the event of a change in the administration. This article provides an overview of some of the potential changes that would have a significant impact on both employers and employees in the event of a Biden win on November 3rd. The potential changes to the retirement system under a Joe Biden presidency remain largely speculative, though some general policy statements have been issued by Former Vice President Biden. First, the “Unity Task Force Recommendations” was developed and published in consultation with Senator Bernie Sanders (I-VT) to address a number of policy issue areas, including retirement. The retirement section of the Unity Task Force Recommendations focuses on discrete issues, including, broadly, saving for retirement and tax credits, pensions, and caregiver access to retirement savings. Though the potential retirement changes have not been fleshed out in significant detail, additional information was subsequently included on certain of these specific issues in the Biden Plan for Older Americans. The following provides an overview of five significant changes to retirement plans that may be enacted in the event of a Biden presidency.

1. Transition from Tax Deferrals to a Tax Credit for Defined Contribution Plan Contributions

The Unity Task Force Recommendations states, in two places, that the “network of retirement savings tax breaks” should be “equalized” to allow for easier retirement savings. The Biden Plan for Older Americans provides a bit more detail on the reasoning behind the policy point by stating that:

The current tax benefits for retirement savings are based on the concept of deferral, whereby savers get to exclude their retirement contributions from tax, see their savings grow tax free, and then pay taxes when they withdraw money from their account. This system provides upper-income families with a much stronger tax break for saving and a limited benefit for middle-class and other workers with lower earnings. The Biden Plan will equalize benefits across the income scale, so that low- and middle-income workers will also get a tax break when they put money away for retirement.

There is no apparent delineation of specific mechanics with respect to how the equalization process will work, though it is likely the broadest and most sweeping of the potential changes to the retirement landscape in the event of a Biden presidency. The policy change to “equalize” the retirement savings playing field would, essentially, replace the tax deduction workers get when making pre-tax contributions to employer-sponsored retirement plans with a tax credit. The most recent statements suggest a flat tax credit, though it is still unclear how the tax credit will be structured.

Illustration: Pre-tax contributions currently offer larger savings for those who are in higher tax brackets because the individual income tax is a progressive tax. For example, an individual in the top tax bracket of 37% would receive a $37 deduction for every $100 pre-tax contribution to a workplace retirement plan. An individual in a lower tax bracket, such as the 20% bracket, would receive a $20 deduction for the same contribution. No amount has been officially proposed regarding the amount of a flat tax credit; however, analyses of structures based on tax credits rather than deferrals conducted by the Urban-Brookings Tax Policy Center suggest that a 26% credit may be revenue neutral. Using this revenue neutral tax credit as the assumed credit rate, all individuals would receive an effective tax credit of $26.00 for each $100 pre-tax contribution to a retirement plan (regardless of income level). At the end of the year, individuals in lower tax brackets could see greater savings as a result of the tax-credits while individuals in higher tax brackets would see lower effective savings for pre-tax contributions.

HBL Comments: The Biden campaign has not released specific details regarding how the tax credit will be structured (including amounts or how broadly it would be applied). As a result, there are uncertainties relating to this proposal, including:

  • The amount of the tax credit?
  • How the amount of the credit is determined?
  • Who is eligible for the tax credit (for example, will it apply to all individuals identically,apply to individuals under certain income thresholds, or will there be a graded tax credit)?

Potential Impact to Retirement Plan Contribution Participation Rates and Levels

It is generally agreed that individuals in lower income-tax brackets do not save for retirement as much as those in higher income brackets and that it would be beneficial to increase retirement plan participation among lower income-tax bracket individuals. However, it is never clear whether a policy change will broaden the scope of those contributing to retirement accounts, since there is no way to tell in advance if more people will contribute to retirement accounts with the tax credit system rather than tax deferrals. It is also difficult to determine whether this would impact contribution rates among those already participating in a retirement plan. Individuals in lower income-tax brackets may increase their participation in employer sponsored retirement plans as a result of a tax credit system rather than one of tax deferrals. As shown in the illustration above, these individuals may very well reap a larger reward at the end of the year due to a flat tax credit. However, there is a disconnect between the time of contribution and the time at which the benefit is received. This is because, at the time a contribution is made, there is no reduction in taxes and paychecks will appear smaller as a result. The promise of a credit at the end of a taxable year may not be enough to incentivize lower income-tax bracket individuals to contribute. At the same time, higher income-tax bracket individuals may change the way they contribute by moving to Roth accounts instead of making pre-tax contributions.

Ultimately, the structure of 401(k) plans may remain unchanged, but alterations to the tax scheme as applied to the plans could result in significant changes to the manner in which participants interact with such plans.

2. Incentivizing Small Businesses to Adopt Retirement Plans

The Biden Plan for Older Americans harkens back to proposals from the Obama-Biden Administration, and it also appears to build on the recently-passed SECURE Act by contemplating additional tax breaks for small business that adopt a retirement plan. The goal of this action is to broaden the scope of workers who are eligible to participate in an employer-sponsored retirement plan by providing incentives to small businesses to offer such plans. Like the other retirement-focused policy points noted in the Unity Task Force Recommendation or the Biden Plan for Older Workers, no details were provided on how, exactly, the incentives would be structured.

HBL Comments: New incentives for small businesses to adopt retirement plans may build upon or extend the relief under the SECURE Act. The Secure Act allowed small businesses to claim a tax credit for qualified startup costs and an additional tax credit for adding an automatic enrollment feature to a 401(k) plan. Together these incentives could total up to $5,500 per year for the first three years the plan and/or feature is effective. A new incentive designed to entice more small businesses to adopt such plans could see an increase in one, or both, of the applicable credits. An additional incentive could be as simple as retaining a lowered credit amount beyond the initial three-year period provided for in the SECURE Act. It is worth noting that automatic enrollment features have been a campaign point for Biden since at least 2007, which may mean that it is more likely to see an increase or extension of an automatic enrollment credit under a Biden presidency.

3. Access to “Automatic 401(k)” for Workers Without Pension or 401(k)-Type Plans

The United Task Force Recommendation briefly mentions the idea of automatic enrollment in retirement savings accounts for workers as a related, though distinct, concept in coordination with point 2, above. This brief reference was subsequently updated in the Biden Plan for Older Americans to include that “almost all workers without a pension or 401(k)-type plan will have access to an ‘automatic 401(k),’ which provides the opportunity to easily save for retirement at work…” No details were included beyond this general policy concept. Though no details were provided regarding how the “automatic 401(k)” would work, previous campaign statements may provide additional (though still generalized) clarity. In 2007, a then-campaigning Biden addressed a campaign point stating that he would seek to make retirement saving easier by requiring employers who do not offer retirement plans to allow employee contributions to individual retirement accounts. Such contributions would come directly from employee paychecks and the accounts would be structured to rollover automatically to follow employees to new jobs.

HBL Comments: Characterization as an “automatic 401(k)” may be a bit of a misnomer since the impact of this policy point is more likely on individual retirement accounts. The extent to which employers would be actively involved in any such change is unclear, but this policy concern could impact employers in terms of payroll management, to the extent that employers are required to include contributions to such individual retirement accounts as a part of their payroll processing practices. This policy may also result in requiring employers with no retirement plans to coordinate with employees in setting up individual retirement accounts or establishing a working relationship with an individual retirement account provider to set up default accounts.

4. Protection of Benefits Earned in Defined Benefit Pension Plans

The Unity Task Force Recommendation included a single line addressing pension plans: “Shore up public and private pensions and help to ensure workers keep their earned benefits by passing legislation that provides a path towards helping distressed plans.” No further detail has been provided regarding how this goal will be achieved, though it does reflect that these pension plans may expect some sort of intended relief under a Biden presidency.

HBL Comments: The form in which this relief may be provided is unknown. Some clarity may be found in other recently proposed legislation that addressed pension plans with funding deficiencies. For example, attention was given to multiemployer and single-employer pension plans earlier this year in the proposed Health and Economic Recovery Emergency Solutions Act (the “2020 HEROES Act”). Division D of the 2020 HEROES Act was titled the “Emergency Pension Plan Relief Act of 2020,” and it proposed broad changes to multiemployer and single-employer pension plans to address benefit funding insufficiencies by:

  • Creating a special partition program for plans in critical and declining status, such that the
    PBGC would take over liabilities for enough participants to allow the plan to become
    financially sufficient to meet the liabilities of the remaining participants;
  • Nearly doubling the limit of benefits covered by the PBGC when it takes over insolvent
    plans;
  • Reinstating benefit cuts previously made to deal with insolvency; and
  • Extending funding improvement and rehabilitation periods. This proposal notably did not contemplate corresponding increases in contributions by those who have pension plans, and it did not contemplate any cuts to new benefits (the proposal, in contrast, generally did not permit new benefit cuts).

 

5. Allow Caregivers with no Earned Income to Save for Retirement

A final point Former Vice President Biden has acknowledged in the Unity Task Force Recommendations and the Biden Plan for Older Americans is the role of caregivers and the ability (or inability) for these individuals to make retirement plan contributions. Current regulations preclude caregivers receiving no wages from taking advantage of tax preferred treatment in saving for retirement. The Biden policy proposals would allow caregivers to make “catch-up” contributions to retirement accounts to take advantage of tax-preferred retirement savings.

HBL Comments: Former Vice President Biden has suggested that this change will be similar to legislation previously proposed by Representatives Jackie Walorski (D-CA) and Harley Rouda (D-CA). This prior legislation would have allowed individuals who took at least a year off of work primarily to care for a family member, and who received no earned income, to make catch-up contributions to an employer 401(k) plan, individual retirement account, or other eligible retirement accounts prior to attaining age 50. Since this prior legislation was explicitly referred to, it is likely that any future proposal from a Biden presidency would follow this same or a similar structure.

Conclusion

With the recent passage of the SECURE and CARES Act, it has been a busy year for employers navigating retirement plan compliance changes. There may also be a myriad of retirement plan changes on the horizon in the event of a change in Presidential administration. Retirement plan sponsors should be prepared to collaborate and coordinate with third party service providers to ensure compliance with the rapidly changing compliance landscape. Beyond just ensuring compliance, retirement plan sponsors should also consider whether changes to the plan or third party service provider relationships may be necessary or desirable. For example, retirement plan sponsors will want to ensure that third party service providers are able to handle potential significant demographic shifts in the plan such as a large increase in lower-income individuals who previously did not participate. Another significant shift could occur because of higher-income individuals moving to Roth contributions, if permitted in the Plan. If Roth contributions are not permitted, it may be also be an appropriate time to consider adopting a Roth feature going forward. Though the impacts of a Biden presidency are unknown, the stage is set for significant changes with the participant pool and the way participants save.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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