What Small Businesses Should Know About Biden’s Retirement Plan

Dylan Telerski / 15 Mar 2021 / Business

During his 2020 campaign, President Joe Biden proposed changes to 401(k) retirement plan rules that would likely benefit low and middle-income earners. In this blog, Ubiquity breaks down the potential impact of the proposed changes.

Traditional 401(k) Regulations

Traditionally, employees in 2021 could contribute up to $19,500 a year. Employers (or self-employed individuals) could save up to a combined maximum of $58,000. Savers can set aside an additional $6,500 in catch-up contributions if they’re over 50. The amount saved is deducted off income for the year, thus reducing their taxable income.

For instance, a person earning $200,000 a year putting in 10% to a 401(k) would only pay taxes on $180,000. Yet, a person earning $40,000 who contributes the same 10% would be taxed on $36,000. Lower earners would not reap as much in tax savings and are less incentivized to save. Employees who don’t save enough for retirement may work well beyond their most productive years because they have to, which decreases company performance and morale.

Biden’s 401(k) Plan

At this point, there is still much we don’t know. Biden says the plan would “equalize” the incentive system by replacing tax-deductible contributions with a flat tax credit for every dollar saved. The exact amount of the credit is yet-to-be-determined, but the Urban-Brookings Tax Policy Center estimates a 26% credit.

So, under this plan, if a person contributes $100, the IRS will issue a $26 credit. Someone earning $600,000 would get the same tax break as someone making $60,000 – a $260 tax credit for a $1,000 contribution. As a “refundable” credit, employees receive the full refund, even if it’s more than what they owe.

By and large, the plan would benefit lower and middle-income earners more, while high earners may move to Roth 401(k) accounts.

Additional proposals of Biden’s small business retirement plan include:

• Automatic Enrollment: 

  Under Biden’s plan, almost all workers will be given the opportunity to conveniently save for retirement at work with a 401(k) savings plan.

• Federal Backing for Multi-employer Defined Benefit Pension Plans: 

  Forthcoming proposals will seek to provide federally backed loans to underfunded multiemployer defined benefit pension plans.

• Social Security Payroll Taxes: 

  High-income earners may be required to pay Social Security taxes on a larger proportion of their income. Now, employees and employers each pay 6.2% of wages to fund Social Security. This tax applies to earned income up to $142,800 for 2021. The new plan would increase Social Security taxes for earnings above $400,000, which would be taxed at 12.4%.

• Financial Transaction Taxes:
  

  Whenever someone buys or sells a security, it would be considered a taxable event. This tax would pay for new government programs. Retirement plans tend to be the largest purchasers of securities, so the additional taxes may change how plan sponsors buy and sell.

• Top Income Tax Rates: 

  The Biden plan proposes to increase the individual income tax rate on incomes above $400,000 from 37 percent to 39.6 percent.

Start Your Small Business 401(k) with Ubiquity

Looking for the best 401(k) for your small business? Ubiquity is a leading provider of 401(k) retirement plans for small businesses, whether you’re looking for a plan that covers one or 100. Our platform provides easy online setup in minutes and management that is accessible 24/7. Ubiquity customer service extends to both employers and employees alike. We are happy to help you navigate legislative changes and advise you on the best moves for your situation, at the industry’s most affordable flat-fee rate. Small business retirement planning can be a challenge, especially when the laws are always changing. Ubiquity is here to help. New plans are eligible for up to $16,500 in tax credits over the next three years, so contact us to learn more.