A little known proposal from the Joe Biden campaign concerning 401(k) plans is giving many in the industry pause for concern.
The Biden proposal would replace the tax deduction that workers get when they contribute to their workplace retirement plan with a tax credit. This reminiscent of a Republican proposal during SECURE Act negotiations that failed to limit salary deferrals.
The idea of replacing the deduction with a tax credit is that it will benefit workers with lower incomes and spur them to invest. I believe that the loss of the income tax deduction may lead highly compensated employees to no longer save for 401(k) plans if it’s less financially rewarding with the loss of the tax deduction. I also don’t think any tax credit will increase the contributions of lower-wage workers to offset the loss of contributions by highly compensated employees.
I’m all for increase incentives to get all people to save for 401(k) plans, I just think this proposal, if passed, will create problems for the 401(k) business.