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Congress: Help Small Employers Offer Retirement but Fairly Allocate Its Costs

I recently wrote about a bill called “RESA” (Retirement Enhancement and Savings) quickly making its way through Congress; it would entice small employers with a tax break to offer retirement benefits to employees by allowing them to band together, acting like a larger employer that can afford to manage and pay for the administration of 401(k) and IRA plans.

I applauded the idea but complained that the cost of RESA (lost tax revenue) was being loaded solely onto my kids should they inherit the plans from me, probably at their highest lifetime tax rate. The idea that they would be force-marched over five short years to pay taxes on an inheritance from me instead of spreading it out over time, undermines some of my motivation for deferring spending now to save and invest. And it breaks the deal I have with Congress. My retirement savings represent many skipped vacations and other family pleasures. I am not just saving for me; I am saving for my children.

In retirement, I plan to continue that frugality. This is good for the state (I am less likely to need taxpayer help) and helpful to my adult children (who will be stuck paying for all the pensions, entitlements and other goodies that Boomers et. al. voted for but did not fund).

David C. Briggs of Dallas did a better job of explaining why I was upset and pointing to the inequity of allowing the very wealthy to shelter and pass on large estates while hitting the middle class with taxes so that small employers can help their employees save.

The goal of encouraging more people to save is a worthy one but the mechanism to pay for it punishes the middle class saver.  Here is his letter in The Wall Street Journal: 

Regarding Robert C. Pozen’s “Make It Easier for Companies to Offer 401(k)s” (op-ed, Nov. 20): The recovery of the entire cost to enhance the opportunity for small businesses to offer retirement plans, in the form of lost tax revenue as a result of the Retirement Enhancement and Savings Act (RESA) changes, is narrowly focused on significantly increasing the tax on distributions to adult children inheritors from middle-class deceased owners’ 401(k) and IRA plans.

Together with homes, 401(k) plans and IRAs are the principal assets of the limited estates of middle-class families. The present system of allowing distributions out of inherited 401(k)s and IRAs over the expected life expectancy of recipients was well thought out and is fair. It allows distributions and thus tax to be spread over an extended period; but the government obtains the benefit of taxing increased distributions as a result of plan investment income, with all distributions usually being taxed at the recipient’s highest incremental rate. In stark contrast, for adult children inheritors, RESA will require immediate distribution of entire 401(k) and IRA assets over five years. This bunching of income will likely cause such distributions to be taxed at significantly higher, possibly confiscatory, rates which such children would never otherwise experience, thereby materially limiting what a deceased middle-class owner could pass on to his children.

Compare this harsh treatment to the taxation of the wealthy, who have been granted individual $10 million tax exemptions, allowing wealthy couples to pass on to their inheritors up to $20 million estate-tax free. The recovery of the cost of RESA benefits should either be spread widely or taxed to those most able to afford higher taxes.

Congress needs to look ahead with its eyes wide open on how the next generations will cope with the debts (government and personal) of their parents and grandparents generations while making a life for themselves and their children. Why not set them up for success?

I am going to send this post to my reps in Congress. Think about doing the same? (Just print it out and drop it in the mail, or email it.)

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