How Biden Wants Small Businesses to Help Employees Save for Retirement

In a few short weeks we’re going to see the transfer of power from President Donald Trump to President-elect Joe Biden, from a Republican to a Democrat, from someone who favors big business to one that has said he’ll have an eye on the small ones.

There will likely be a handful of changes coming down the pipeline that will impact business in the United States. One of them is Biden’s plan to shake up how 401(k) retirement savings plans work today and shifting them to work better for small businesses and the lower earners they tend to employ.

Not sure how exactly 401(k)s even work right now? Maybe you’ve heard Biden mention his plans but aren’t sure what to make of it? As January 20 inches closer and closer, here are all the essentials you need to know about the changes Biden has mentioned bringing to retirement savings, should he keep the promise he campaigned on.

What is a 401(k) retirement plan?

Matching employee 401(k) contributions is a benefit that many businesses big and small choose to offer their workers up to a defined amount set by the IRS.

401(k)s are retirement investment plans names after the section of the IRS code that defines them. They’re popular because matching employee 401(k) contributions is a benefit that many businesses big and small choose to offer their workers up to a defined amount set by the IRS. Contributions that employees make are also usually withheld from paychecks. Not only does this make stowing the money away an easy endeavor, but the contributions make a small dent in income taxes since they’re taken out of people’s pay before they’re taxed on that pay.

In traditional 401(k) plans the contributions people make (AKA the money they put into the account) isn’t taxed until it’s withdrawn, which usually happens after retirement. Contributions to Roth 401(k) plans, on the other hand, are taxed when they’re made, so these plans can benefit people who plan to retire in a higher income bracket than they are in today.

How 401(k) retirement plans work today

It’s pretty straightforward: Employees dedicate a certain dollar about or percentage of their pay to their 401(k) savings pre-tax. Employers can choose to match all or a portion of their employees’ contributions up to a combined contribution of $57,000 per year for people less than 50 years old. This is how employers help their workers save for retirement.

The problem with how 401(k) plans work today is that they deeply favor high earners. Ten percent of income for someone making $250,000 a year is a much, much higher contribution and subsequent tax deduction than it is for someone making, say $35,000 a year. Ultimately, the way that 401(k) plans are structured now means that lower earners (AKA those more likely to work at smaller businesses rather than major corporations) are far less incentivized to save for retirement than higher earners.

Biden’s new ideas for 401(k) retirement plans

Should Biden execute on the idea that he’s been promoting and that has yet to have the fine details worked out, it would change how contributions work. Rather than deducting them from income, contributions would make people eligible for a refundable tax credit instead. The exact percentage of the tax credit has yet to be established, but 26% is the number that has been recently talked about. Say that the Biden administration does settle on 26%. That would mean for every $100 an employee contributes to their 401(k), they’ll get $26 back in the form of a refundable tax credit that can be dedicated from the amount of taxes owed at the end of the year.

Say that the Biden administration does settle on 26%. That would mean for every $100 an employee contributes to their 401(k), they’ll get $26 back in the form of a refundable tax credit that can be dedicated from the amount of taxes owed at the end of the year.

What this means for small business employees

Critics say that these changes will make business owners less likely to continue offering 401(k) matches, but the president-elect believes that the result will be an increase in equity.

While 401(k) matching is certainly an incentive, it’s a far off one that doesn’t have tangible, immediate benefits — and people like tangible, immediate benefits. The opposite is true with tax breaks. Each April there will be an immediate benefit from making contributions to 401(k)s and, thus, preparing better for retirement. We live in a world where pensions are all but a thing of the past and the risk of saving for retirement has been shifted away from employers and onto employees. If Biden’s plan can get more lower-income earners saving for retirement, it’s going to be a good thing for the people working at small businesses.