What Could President Biden’s Proposed Changes to 401(k) Plans Mean for You?

The 401(k) plan was introduced in 1978, and since then has become one of, if not the, most popular retirement plans in the US. 401(k) retirement plans are offered by employers and give employees the opportunity to save for retirement while they earn. 401(k)s also offer a tax break on employee income—income set aside in a 401(k) is not taxed until it is withdrawn years later. Some employers will match a percentage of an employee’s contribution incentivizing the use of these plans. 

Recently, President Joe Biden proposed some changes to 401(k) plans. Because the 401(k) has been around for so many years, any talk of changing it stirs up lots of questions and anxiety. Let’s take a look at what these changes are, and what they could mean for you if the Biden 401(k) plan becomes law. 

What changes is President Biden proposing? 

First, the tax deduction associated with the 401(k) plan would be replaced by a tax credit. What’s the difference between a tax deduction and a tax credit?

• Tax deductions reduce the income you’re taxed on. 

• Tax credits, on the other hand, reduce the amount of taxes you have to pay. 

So instead of receiving a tax deduction based on the amount of money you put into a 401(k), a tax credit reduces the actual amount of taxes you have to pay based on your 401(k) contribution. 

What could that mean? 

Biden’s proposed tax credit is 26% across the board, no matter what your annual income is. This is the main difference from the current 401(k), which benefits higher-income earners more than middle and lower-income earners. By setting the tax credit at 26% for all income levels, the tax advantage of contributing to a 401(k) for higher-income earners would be reduced, while the advantage for lower and middle-income earners would be increased. 

What could this mean for the large percentage of people whose employers do not offer a 401(k)? Biden’s proposed changes would make 401(k) plans available to everyone. In fact, it even allows caregivers without a formal paycheck to save for retirement with a 401(k). Whether these Biden 401(k)s would be private-based or government-based has not been discussed. 

While Biden’s plan has not yet been voted into law, you probably have questions about how the plan could impact you as an employer and a taxpayer. We recommend speaking with your tax professional or, better yet, a retirement plan compliance specialist. These specialists can best answer your questions for your unique income tax situation.