Election 2020: 8 Things to Know About Joe Biden’s Tax Plan’s Potential Impact — Corporate Pension and Savings Plans

Vice President Biden’s suggestions on tax policy changes address corporate and personal tax rates. But these changes will potentially impact corporate pension plans, too. Today we explore what this might look like and what you should know. 

1. Increases the top marginal individual income tax rate on incomes in excess of $400,000 from 37% to 39.6%. This change may cause some companies with high earners to rethink their total rewards strategy.  Income deferral opportunities will likely become more attractive to higher wage earners. We expect this will create greater interest in non-qualified deferral opportunities. And for companies with defined benefit plans, we expect this will increase interest in finding ways to creatively move non-qualified benefits into their defined benefit plans (yes, you can really do this) to better secure the benefit while also taking advantage of the tax benefits.

2. Increases the top corporate income tax rate from 21% to 28%. The higher the top corporate income tax rate, the more valuable deductions are. Companies may find it more financially attractive to contribute higher amounts of money to their defined benefit plans.  Additionally, the higher deduction may also create the opportunity for companies to use the savings as a means of increasing company matches to 401(k) plans or profit sharing plans.

3. Creates a new minimum tax on corporations with “book profits” in excess of $100 million. This not yet well-defined tax could decrease the value of tax deductions for qualified retirement plans as well as those on executive benefits whose timing aligns with the timing of tax payments by those executives.  

4. Giving small businesses a tax break for starting a retirement plan and giving workers the chance to save at work. The Biden Plan will call for widespread adoption of workplace savings plans and offer tax credits to small businesses to offset much of the costs. Under Biden’s plan, almost all workers without a pension or 401(k)-type plan will have access to an ‘automatic 401(k),’ which “provides the opportunity to easily save for retirement at work – putting millions of middle-class families in the path to a secure retirement.”

5. Changes the tax treatment of 401(k) deferrals from income deduction to a tax credit. Traditional 401(k) plans will become less valuable for high earners and more valuable for low earners. Higher earners will seek other means of retirement saving including, for example, Roth plans and other non-401(k) plans.

6. Creates a Social Security tax “donut hole” whereby wages between the wage base and $400,000 would be exempt from OASDI (12.4% split between employer and employee), but pay in excess of $400,000 would be taxed. This is intended to make up some of the current gap between Social Security inflow and outflow while not punishing what might be referred to as the upper middle class.  

7. For income in excess of $1 million, taxes capital gains and qualified dividends at the ordinary income tax rate. Capital gains inside a qualified retirement plan or IRA are not subject to federal income taxes, increasing the value of the tax benefit for very high income individuals.

8. Restores the so-called Pease limitation (limit on itemized deductions) for high earners. Qualified deferred compensation, i.e., retirement plans, generally are not a deduction subject to the Pease limitation.

Clearly, the calculus will be different for every sponsor of qualified retirement plans. Be sure to look for upcoming articles that take a deeper dive into specifics that might affect your organization.