Benefits and executive compensation partners Brad Campbell and Fred Reish address implications of the American Rescue Plan Act of 2021, which would freeze the annual cost-of-living adjustments for overall contributions to defined contribution plans and for the maximum annual benefit under a defined benefit plan starting in 2031.
In the ThinkAdvisor article “Stimulus Bill Freezes Retirement Plan Contribution Limits,” Campbell said, “Freezing the limits is bad policy in that it prevents many Americans, including many small business owners, from being able to save enough for retirement as inflation erodes the value of savings. It is an unfortunate reality of the Congressional process for tax legislation that so-called ‘revenue raisers’ often target the retirement system.”
Reish explained that as to 401(k) plans, under current law, “The Internal Revenue Code section 415, the deferrals, company contributions and matching contributions for an individual are limited to $58,000 in 2021.”
“But that limit increases every year due to cost-of-living adjustments. However, the Budget Reconciliation bill proposes to eliminate those cost-of-living increases for years after 2030. The concept is that change will reduce tax deductions in the future, saving money for the government to offset other expenditures in the bill,” Reish said. “That change would not apply to collectively bargained plans.”
Over time, the provision will “cap the contributions and benefits of highly compensated employees, including, for example, successful owners of closely held and family business, as well as executives and professionals,” Reish noted. “The risk is that the change could reduce the attractiveness of setting up plans for smaller firms.”
Reish added, “That limit is not imposed on Taft-Hartley negotiated union-management plans, allowing higher compensated employees in those plans to have higher benefits as inflation increases take hold.”