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5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
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CCH® PENSION — 08/11/11

Capping tax-preferred 401(k) contributions would hurt both high and low income employees, says EBRI

A deficit reduction recommendation to cap the annual tax-preferred contributions for 401(k) plans to the lower of $20,000 or 20% of income would cause large reductions in retirement savings for both high- and low-income workers, according to a study by the Employee Benefit Research Institute (EBRI).

The recommendation, known as the "20/20 cap," put forward by the National Commission on Fiscal Responsibility and Reform, would most affect the highest-income workers, which, the EBRI noted, is not surprising, since those with high income tend to save the most in 401(k)-type plans. However, the EBRI also found that the cap would cause a big reduction in retirement savings by the lowest-income employees as well.

The study evaluated the impact of applying the 20/20 caps starting in 2012. The highest-income quartile within each age cohort experiences the largest average percentage reduction. However, for each age cohort other than the oldest one, the lowest-income quartile has the second-highest average percentage reductions. Primarily this is because their current or expected future contributions would exceed 20% of compensation when combined with employer contributions, the EBRI study found.

Source: EBRI press release #932, July 11, 2011.

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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