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February 5, 2003
The Small Business Council of America ("SBCA") warned today that if the administration's retirement plan proposals were to become law, millions of small business employees would lose retirement plan coverage. "There is a very fine balance between a small business owner maintaining a retirement plan which benefits all of the employees of the company or taking the profits out of the company as compensation," said Paula Calimafde, Chair of the SBCA. "The success of the voluntary retirement plan system for small business rests on tax incentives for the business owners in sponsoring the plan. Unless the tax incentives cover the administrative expenses and some of the costs of the contributions for the non-owner employees, in many cases a retirement plan will not be established. Some academicians argue that tax incentives do not affect small plan formation, but the experts who actually practice in the field remember when the system almost collapsed in the late 80's due to the removal of many of the tax incentives."
Under the newly announced administration's retirement plan proposal, all deductible IRAs, 401(k)s, Simplified Employee Pensions (SEPs), and Simple-IRAs as we know them would cease to exist in 2004. The proposals would waive income restrictions on the use of expanded Roth IRAs, creating tax-deferred Lifetime Savings Accounts ('LSAs") that could be used for any purpose. Retirement Savings Accounts ("RSAs") would also be created. These new plans would replace the current IRA program. The new LSA would allow an individual, regardless of age or income, to contribute $7,500 a year and take penalty free withdrawals at any time for any purpose - with no holding period. Like Roth IRAs, contributions will not be deductible but earnings and distributions would be tax-free. The new RSA would permit an individual, regardless of age or income, to contribute an additional $7,500 a year for retirement. 401(k) plans would be combined with other, similar employer-sponsored retirement savings plans into a new plan called an "ERSA" (Employer Retirement Savings Accounts), which would allow each eligible employee the opportunity to defer an additional $12,000 per year if the employer chose to sponsor such a plan. In a major departure from the existing retirement plan system which is remarkably successful, this new one-size fits all plan design is not optional, but mandatory.
These proposals represent a major change and should therefore be thought through very, very carefully. Under current law, the employer's tax savings allow employers to pay for all or part of staff contributions. Under the administration's proposal, because employer contributions are cut back for owners, it is likely that the employer will forego plan contributions for employees and instead pay bonuses to the owners.
LSAs could encourage workers to save for more short-term goals, leaving many unprepared for retirement. A family of four would be able to save up to $30,000 a year in LSAs (plus any additional put in by parents or grandparents). If employees want to save on a deductible basis, then they can use an ERSA, if their employer offers one. The question is whether businesses will offer ERSA plans when each married owner with, for example, two children can contribute $30,000 per year to LSAs ($7500 for each of the four) plus $15,000 more to RSAs, for a total of $45,000. Even assuming the company decides to provide an ERSA, because of technical changes embedded in the administration's proposal which significantly decrease the tax incentives of sponsoring the plan, it is likely that employer contributions will be stopped for all employees.
"By increasing the IRA limits to create LSAs and RSAs, there would be little incentive for a small business owner to establish a new ERSA plan," said SBCA's President, Al Martin. "These new proposals also eliminate a large part of the deduction for contributions made by the employer making it likely that these plans will not be adopted by small businesses. This proposal cutting back the tax incentives inside the retirement plan would gut the small business retirement plan system. About 42 million Americans are covered by 401(k) plans. Anything that would impair them is very, very serious," said Martin. Small business owners who want to save for retirement now have an incentive to start a 401(k) plan because they get deductible annual tax-sheltered savings of up to $12,000, plus whatever the company contributes.
The bottom line is that the administration's retirement plan proposals will allow those who have the cash to greatly expand the amounts they can contribute to tax free accounts. The proposal favors the wealthy, who will simply shift existing savings into the new tax-free accounts. But for the small business employees who cannot afford to save, these proposals won't help, and they'll hurt if employers discontinue or curtail their plans.
"The mandated ERSA could not come at a worse time. Every retirement plan in the country has or will be completely rewritten by September 30, 2003 to stay in compliance with the law. The administration would then have every company freeze its newly rewritten plan and start up a new plan. The costs of setting up the new plans would be substantial - new communication material would have to be developed for employees, new software would have to be developed and in-house administrators would have to learn all new rules. The cost of these new and needless administrative expenses are dollars that would have gone into the retirement accounts of the employees. It is likely that most small business owners will simply choose to terminate rather than incur the direct and indirect costs of establishing a new plan," said Calimafde.
The administration's proposals imply that simple plan designs are not available for micro small businesses today. In fact, there are two extremely simple plans, the SEP and the SIMPLE, both of which are actually simpler than the new ERSA. Both the SEP and the SIMPLE however, protect the non-owner employees so that contributions must be made for them. Micro small businesses are beginning to adopt SEPs and SIMPLEs in unprecedented numbers. It appears that the data the administration is using to justify jettisoning the entire defined contribution retirement plan system predates the existence of the SIMPLE. It is important to let these new plan designs operate and determine in four or five years whether the SIMPLE is working. Initial feedback is that the SIMPLE is attracting record numbers of very small businesses-- those in the most financially precarious position, who are most likely not to sponsor a retirement plan.
The administration's well-intentioned but misguided proposals have the potential to significantly weaken the future retirement security of millions of small business employees. These proposals basically cut small business employees loose from the meaningful contributions which employers are required to make for them.
Over the years Congress has understood that the price of increasing staff costs too high is the termination of small business plans. The disruption to the small business plan system could be devastating, similar to the impact of the rules which reduced tax incentives for owners enacted in the late 70's and 80's. Owners could each contribute $15,000 each for themselves and spouses (plus $7500 per child) each year and simply terminate their retirement plan, using the savings to pay the taxes on their personal contribution. Tampering in such a major way with the private pension system will cause millions of Americans to lose their retirement security.
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The Small Business Council of America (the SBCA) is the only national organization whose sole purpose is to represent the interests of private and family owned businesses in federal income and estate tax, pension, health care and other employee benefit concerns. The SBCA, through its members, represents well over 20,000 enterprises in retail, manufacturing and service industries, virtually all of which sponsor retirement plans or advise small businesses which sponsor private retirement plans. These enterprises represent or sponsor well over two hundred thousand qualified retirement plans and welfare plans, and employ over 1,500,000 employees. The primary goal of the SBCA is to enact favorable federal tax and employee benefit laws for small businesses. The SBCA supports legislation which creates important economic incentives, and opposes burdensome and oppressive laws and proposals. The SBCA played a leading role in shaping the pension provisions in EGTRRA and in helping its passage through Congress.
On the web at www.sbca.net
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For Immediate Release
Contact: Paula Calimafde
301 951 9325
calimafd@paleyrothman.com
View the full text of the press release (click here). |
