The Tax Reform Plan That Could Kill the 401(k)
Though specific policy details remain elusive on many key issues in the 2016 presidential campaign, the tax reform proposal of a leading candidate could undermine the 401(k).
Sen. Marco Rubio (R-Fla.), after his surprisingly strong third place finish (just behind Donald Trump and Ted Cruz) in the Iowa caucuses, remains well positioned to become the Republican party’s “establishment” standard-bearer, despite some awkward moments in the latest Republican debate over the weekend. Should Rubio withstand these political headwinds and do well in New Hampshire, he could quickly consolidate support from Republican Party elders and key donors desperate to nominate someone perceived as more “electable” than the brash and unpredictable Donald Trump or the conservative firebrand Ted Cruz. It is still anyone’s guess about how it will all shake out, but it is worth taking another look at Marco Rubio’s tax reform proposal since he could yet capture the Republican nomination as well as the White House.
Generally seen as a moderate, Rubio’s tax reform proposal
is actually more radical in some respects than his competitors’ plans, especially with regard to his proposed tax treatment of capital gains and dividends. His proposal zeroes out completely all taxes on capital gains and dividends. (Current law taxes capital gains and dividends at a 23.8% maximum rate for high-income earners.)
And therein lies the rub for 401(k) plans: The elimination of capital gains and dividend taxes would also eliminate the incentive for a small business owner to adopt or maintain a 401(k) plan for himself or his employees. This is because 401(k) accounts are currently not subject to capital gains and dividend taxes unlike regular taxable savings accounts. Instead, 401(k) accounts are allowed to grow tax free until distributions from the account are made. While employers can still deduct employees’ pay as an ordinary and necessary business expense, that tax break alone will not be enough to justify a 401(k) plan.
Simply put, the Rubio tax reform proposal would decimate the small business retirement plan market.
Elections matter and so do each candidate’s positions on the key issues, including tax reform. It just so happens that Sen. Rubio’s tax reform plan, should it become law, could suck the lifeblood out of small business retirement plan formations.Andrew Remo is the American Retirement Association’s Director of Congressional Affairs.