Potential Retirement Plan Impacts In 2021

The Biden Administration has proposed several changes to the tax treatment and availability of qualified retirement plans as we move forward in 2021. Following is a summary of some of these potential retirement plan provisions that may impact plan sponsors and participants going forward.

From Deduction To Tax Credit

Seeking to equalize the tax benefits of 401(k) plans for participants, the Biden Administration has proposed replacing the tax deduction for 401(k) contributions with a tax credit.

Currently, participants make pre-tax contributions to a 401(k) and defer paying tax on that money until it is withdrawn from the account. This tax deduction typically provides the most significant tax break to participants with the highest incomes at the higher tax rate.
The proposed tax credit, to replace this deduction, is 26% across the board, regardless of the participant’s income level. Low and middle-income participants will likely receive a bigger tax benefit as a result.

Automatic 401(k)s For All

A significant portion of the American workforce does not enjoy the tax advantaged benefits for saving for retirement via a qualified retirement plan as a plan is not provided by their employer. Consider the challenges of small businesses, the growing gig economy, not to mention the financial impact of the pandemic. There are many reasons Americans are not able to save for retirement through an employer-sponsored plan.

Recognizing this, the Biden administration has proposed creating an “automatic 401(k)” for employees who do not have access to a retirement account through their employer.
Those individuals will now have access to 401(k)s they can contribute to, with contributions deducted from their paychecks.

Studies have shown that typically when people are offered the chance to save in a 401(k), they take it. According to a survey by the Plan Sponsor Council of America, nearly 90% of employees who had access to a 401(k) at work, in 2019, made contributions.

Caregiver Catch Up

The Biden Administration has also proposed allowing caregivers to make catch-up contributions to retirement accounts, even if they are not earning income in the formal labor market. This could be a significant benefit for many.

For example, as a recent article in The Wall Street Journal explored, many women faced with the extreme challenge of juggling work and childcare and education dropped out of the workforce as a result of the pandemic. In fact, according to the Bureau of Labor Statistics, workplace participation by women fell to levels not seen since the mid-1980s. This cohort could likely benefit from a caregiver catch-up opportunity.