Recent news about small businesses and retirement security has been bleak. An American Express survey found that 60 percent of small-business owners haven’t saved enough for retirement. Even employees of small businesses are in trouble: Only 14 percent of employers with 100 or fewer workers offer a retirement-savings plan, according to a Government Accountability Office report.
Given the obstacles small-business owners already face when it comes to retirement savings, many policy experts are questioning a recent proposal by President Obama to cap tax-deferred retirement savings. Under Obama’s plan, the total value of defined-contribution plans—such as 401(k)s and IRAs—would be capped at the same amount as defined-benefit plans. In 2013, for example, that would be about $3.4 million.
A new analysis by the Employee Benefit Research Institute finds that nearly 1 in 10 current 401(k) participants would hit the proposed cap before age 65. As interest rates rise, even more retirement savers would be affected and forced to stop contributing.
Policy experts say the proposal could particularly hurt small-business owners, who often save through special retirement savings plans, such as SEP-IRAs and solo 401(k) plans. These plans currently allow participants to contribute up to $56,500 per year, meaning the self-employed individuals can sock away much larger amounts than participants in traditional employer-sponsored retirement plans.
Experts are also worried that small-business owners will have less incentive to offer retirement savings vehicles under Obama’s plan. Business owners may be tempted to drop their employee retirement plans once they hit the cap on their own account, the EBRI study finds.
“Small-business owners have been playing by the rules all along,” Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries, told BenefitsPro.com. “They saved each year within federally dictated contribution limits and they provided matching and other contributions to their employees to comply with federally mandated nondiscrimination rules. Now these small-business owners are being punished for doing right by their workers and saving and investing successfully.”