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Changes for Small Business Retirement Plans in 2013

Federal lawmakers are turning over every financial rock in the economy, looking for new ways to pay off the national deficit. But what if their efforts make economic conditions even worse?

That’s the concern of small business advocates, whose representatives on Capitol Hill are trying to protect small business retirement plans.

They contend that lawmakers are researching new regulations that could squeeze more tax revenue from 401(k)s and IRAs but ultimately make the plans less desirable to set up, robbing employees of the opportunity to plan their retirement with funds that currently enjoy better tax advantages, small business advocates say.

These retirement plans are a fairly big target for Congress right now. As of September 2012, Americans had socked away about $3.5 trillion in 401(k) accounts and $5.3 trillion in IRAs, according to Bloomberg News. The “sequestration” cuts recently enacted by Congress and President Obama total $1.5 trillion over the next 10 years. Clearly, these tax-deferred funds far outshine deficit-reduction efforts, which makes them a desirable answer for our fiscal problems.

The irony is that the federal government still gets its share of these tax-deferred funds down the road: When money is withdrawn upon retirement, that money is taxable. The essence of the concern is that the federal government may want more money “up front” to solve deficit problems by making these plans less desirable, says Alson Martin, a longtime business lawyer and chair of the nonprofit Small Business Council of America.

“Longer life expectancies and the prospect of reduced Medicare and Social Security benefits require significant retirement savings for a decent retirement,” Alson writes in an email. “The employer-based qualified retirement plan system has been extremely successful in providing retirement security for workers of all income levels.”

But one of the leading federal researchers on the subject, Rep. Pat Tiberi, R-Ohio, says those concerns are unfounded. Tiberi – a former Realtor who has participated in both private, IRA-like retirement plans and public 401(k)-like retirement plans as a Congressman – is chairing a special group studying American pensions and retirement plans at the request of Michigan Republican Dave Camp, who leads the House’s powerful Ways and Means committee, which can set tax policy for the US.

Tiberi says the group met for the first time on February 27 to begin refresher courses on the US tax code governing pensions and retirement plans. Next week they will see percentages of just how many employers and employees are using the various retirement financial tools. The goal is to streamline tax laws to encourage more saving, more entrepreneurship and better retirement planning.

Creating new tax revenues by changing laws for small business retirement plans is not being discussed, he says.

“I don’t know anyone who has said that. I haven’t heard one Democrat or Republican say we’re trying to take away things.” Tiberi’s and the committee members are looking at things that will encourage people to save more for retirement. “We don’t want to take away things that work.”

Regardless, small business advocates like Martin remain vigilant. Taking away the tax benefits of the retirement plans – both for employees and the employers who set them up – will only result in business owners redirecting the savings toward their own salary, the business and capital purchases, or their own savings, Martin says, citing similar US legislation in the 1980s that had the same effects.

But adding to their vigilance is also the fact that Americans just haven’t been very good at saving money, and these plans are among the most effective ways to entice them to do just that.

A 2011 federal study of W-2s showed roughly half of all American workers are believed to be covered by some sort of qualified retirement plan like 401(k)s or IRAs.

About 77 percent of those covered worked at companies with 10 or more employees. Of that group, 62 percent of employees made contributions to their 401(k) accounts. But interestingly, when asked if they remembered making those contributions from their paychecks, a significant number of employees said they did not – about 13 percent.

Martin and others like him say this is why protecting these funds from new tax legislation is crucial. They are like phantom savings accounts working in the background for many Americans who have huge retirement dreams but may have a loose grasp on the reality of how to attain them. They simply rely on tools offered by their employer.

But the intent for altering small business retirement plans is growing. A recent report from the influential, left-leaning Brookings Institution suggests capping contributions for America’s highest earners to help generate more funds for the federal government. The theory is that by blocking high-income earners from putting more money in these accounts, those individuals would be forced to put there money elsewhere where it enjoys fewer protections from the proverbial tax man.

“We really need to think hard about whether the dollars we are spending are effective at achieving the goals,” said Karen Dynan, the author of the Brookings report, told Bloomberg News in this February 25 story. “Our existing programs are falling short.”

At Palma Financial Services, we are aware of these changes and ready to help your small business succeed. Our financial planning expertise also includes setting up retirement plans for small business owners using a wide variety of funds and approaches. These plans can help increase employee loyalty and retention rates, so make sure to schedule a consultation to ensure a bright future for your bright idea.

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