Retirement plan advocates are concerned about provisions included in the $1.9 trillion American Rescue Plan Act of 2021, which passed in the House of Representatives on Saturday.
Specifically, the package calls for a freeze on annual cost-of-living increases to contribution limits for defined benefit and defined contribution retirement plans.
As the powerful House Ways and Means Committee notes in a description of the reconciliation of the bill, defined contribution annual increases for each plan participant “are limited to the lesser of (1) 100 percent of compensation or (2) $40,000. The $40,000 amount is adjusted annually for cost-of-living increases in $1,000 increments. For 2021, this amount is $58,000.”
Under the proposal, the $40,000 amount, as well as the $160,000 amount applicable to a defined benefit plan, will not be adjusted for cost-of-living increases after 2030.
Similarly, it adds, “the limit on annual compensation of a participant that may be taken into account under a plan is not adjusted for cost-of-living.”
“The risk is that this change will, over time, reduce the attractiveness of retirement plans for the owners of closely-held and family businesses, which could result in fewer plans being set up by small companies,” ERISA expert Fred Reish, a partner with legal powerhouse Faegre Drinker Biddle & Reath, said. “In addition, it overtly favors employees in negotiated plans, which many may view as inappropriate.”
American Retirement Association Chief Executive Officer Brian Graff was also quick to condemn what he called a budget gimmick, noting the 2030 effective date.
“The ‘explanation’ of the provision noted in the article is particularly maddening given 1) it totally ignores the impact of the nondiscrimination rules 2) collectively bargained plans are exempt from the freeze so apparently, it’s ok for higher income union folks to get bigger tax benefits,” Graff explained in a LinkedIn post on Monday. “Fortunately, we have an opportunity to fix this in the Senate and we are working hard to try and get this misguided provision eliminated.”
The bill has come under fire from Republicans for its size and what they claim is a “wish list” of Democrat spending priorities unrelated to COVID relief. The latter points to direct stimulus money to Americans hard-hit by the pandemic and billion for small business relief.