Democratic presidential nominee Joe Biden has proposed a plan to change 401(k) retirement savings accounts. In his recently unveiled tax plan, the former vice president called for “equalizing the tax benefits of retirement plans.”

The plan, which calls for changing the way 401(k) accounts (as well as other qualified plans) are treated in the tax code. The Biden campaign says qualified plans are not helping low to middle income earners as much as it is helping high income earners.

They state that a high-income earner (because they pay more in taxes) gets a "bigger" benefit from deferring their income in a qualified plan than a lower income earner (because they pay less). Obviously, this is ignoring the FACT that income taxes will be paid when the money is withdrawn from the plan.  

Biden's Solution (Tax Credits?):

The solution to this perceived problem is a tax credit rather than a tax deduction for contributions. The campaign has not exactly specified what the tax credit would be, but some estimate it might be 26%. This would in their words "equalize" the benefits of qualified plan contributions. For example, if you are in the 10% tax bracket and contribute $100 rather than get a deduction for the $100 you would actually get a credit for $26.

The Unintended Consequences:

This seems wonderful! However, these decisions cannot be made in a vacuum and there will be unintended consequences. It almost begs the question; If I am a small business owner, why would I set up a 401k outside of just employee benefits? There will be little if any reason to have a safe harbor style of plan so matching would all but disappear. 

If I believe taxes will be even high in the future and I will only get a 26% tax credit. Why would I defer my taxes into the future when it is unknown how high these taxes may get? Most business owners (small) set up qualified plans so they can get a deduction. The secondary benefit is for the employees. So, if you take away the larger tax deductions many business owners will not see the value in doing a plan with big employer contributions. May "high-income" earners will switch over to ROTH 401k options. Cash value life insurance could also be another alternative for high income earners. 

The Bottom Line:

The unintended consequences of this "plan" would likely harm the people it is intended to help the most. You will see a reduction in benefits from qualified plans (Matching, profit sharing, etc.) and a flight to alternatives, like non-qualified options.