Tax the rich – and limit retirement contributions? It doesn’t add up

By: Aaron Friedman

Tax the rich!  Raise their rates! Limit their deductions! That seems to be the populist mantra. It’s perpetuated in the press, and there’s some indication that the general public seems to support the idea. Now middle class workers with higher than average incomes seem to be caught up in discussions defining those that are “rich.”

As this applies to tax-exempt organizations, we’re talking about hospital administrators, educators, executive directors of local community and other charitable organizations – people who generally earn a better than average income, yet by no stretch of the imagination do their incomes compare to Warren Buffett’s. And when it comes to the impact on their employers’ retirement plans, shouldn’t the tax structure support retirement readiness for those who have dedicated their careers to giving back to their communities?

For example, current conventional belief supports that people should be saving 11-15% of their pay, including matching contributions, every year throughout their working careers in order to save enough to be retirement ready. Assuming a 3% match, and therefore an average of a 12% annual savings need, anyone earning less than approximately $146,000 annually should be fine. (12% of $146,000 is approximately the $17,500 annual limit.)

However, what about the person making $250,000 per year? Contributing a maximum of $17,500 only equates to 7% of pay. When the match is included it’s still short of the target necessary for retirement readiness — yet as the numbers show, these limitations currently in place put these people at a disadvantage for retirement savings. In addition, one of the alternatives under consideration is limiting qualified plan contributions even further.

Fortunately, there is something that can be done. Private (non-governmental) tax-exempt organizations can maintain a deferred compensation plan under section 457 of the internal revenue code. These 457 plans allow for additional benefits for a select group of management or highly compensated individuals, over and above the limitations in their 403(b) or 401(k) plan.

457 plans are an excellent tool for tax-exempt organizations to be able to recruit, retain, reward and retire key personnel. In other words, they help meet the goals of the organization (which in turn, serves their communities) while empowering key employees to meet their financial goals.

Last summer, Sen. Tom Harkin released a report called “The Retirement Crisis and a Plan to Solve It.”  One premise of the report is that there is inadequate savings for Baby Boomers and Gen Xers to pay for basic expenses in retirement. The report footnotes studies that show this ”retirement income gap” is between $4.3 and $6.6 trillion, but as we see above, there is already pressure in regular tax rules that make it difficult for higher-than-average income people to achieve retirement readiness.

As Congress continues the tax debate, it’s important that we consider what’s good for the long term, and helping all plan participants achieve retirement readiness should be of paramount importance. Tax reform and retirement policy should not be at odds. 

Not Too Early To Plan For Health Taxes, H&R Block Says

By Jay Hancock


Even if you owe Affordable Care Act taxes, you probably won’t have to start paying them until next year. But H&R Block wants you to come in and talk about them now.

“The Affordable Care Act means big changes this year when you file your taxes,” a chipper Block employee says in a new television ad. She says the company offers a free “tax and health care review.”

Actually, most health act taxes kick in this year and in 2014, so the earliest you’d have to file them is a year from now. (Tanning parlors starting paying their health-act taxes in 2010, but they’re probably not filing through H&R Block.)

But Block says it’s not too early to get advice on potential health act tax liabilities and eligibility for health coverage.

“When we talked to consumers it was very apparent that they are very confused about what’s going on,” says Meg Sutton, senior adviser for tax and health-care services at Block. “It’s critical that consumers get out and educate themselves about the Affordable Care Act and how it can affect them and their families.”

For example, those without health insurance may want to know what their penalty would be if they don’t sign up for coverage by the 2014 deadline, she said in an interview. And if you want to get coverage for next year, the exchanges will use the household size and income on your 2012 tax return to determine your eligibility for subsidies, some of which will be delivered as an income tax credit.

Many health-act taxes will be paid by high-income households, which probably don’t use H&R Block either. Starting this year couples with more than $250,000 in income will pay a payroll surtax for Medicare and a 3.8 percent tax on investment income.

But non-high-rollers could also be paying taxes to finance the health act. Starting in 2014, most individuals who lack health insurance will owe a penalty to be collected by the Internal Revenue Service. The penalty, which the Supreme Court ruled is a tax, starts at $95 and rises to $695 in 2016.

Households may also owe extra tax thanks to an increase in the floor for deducting health costs. Starting this year most folks can deduct only medical expenses that exceed 10 percent of their income; it used to be 7.5 percent. The health act also caps at $2,500 how much you can contribute to a pre-tax flexible spending account for health care. (Health savings accounts, a type of pretax account without the “use it or lose it” provision in FSAs, have different rules.)