Obama’s Final Budget: What’s in it for Retirement Plans?
The Obama administration’s final budget
wasn’t a complete retread of its prior retirement plan proposals, but there wasn’t much good news for employer-sponsored retirement plans.
Small business owners and small business retirement plans were once again targeted
by a proposal that would limit the value of the retirement tax deferral at 28%, thereby levying a “double tax” on any individual in the 33%, 35% or 39.6% tax brackets who wishes to contribute to a retirement account. A second misguided proposal would limit the total aggregate amount of money an individual can save in tax-favored retirement accounts based upon a complicated annuity conversion calculation which, along with being an administrative nightmare, callously punishes savers that made good decisions over their working career to secure their retirement.
Finally, the budget includes for the second year in a row a laughably unworkable proposal requiring employers to report their contributions to defined contribution plans on the Form W-2. This proposal totally ignores the fact that employers may not know their contribution amounts until shortly before the due date of their tax return, which is months after the due date of the Form W-2.
Multi-employer Plans and MEPs
On a brighter note, the Obama administration finally recognized the damage that recent repeated increases in Pension Benefit Guaranty Corporation (PBGC) premiums is doing to single-employer defined benefit pension plans. The current budget states the administration’s view that “additional increases in single-employer premiums are unwise at this time.” However, the Obama administration asked that the PBGC be given discretion to raise $15 billion in additional premium revenue from multi-employer plans. This would be done through a new multi-employer variable-rate premium based on a plan’s level of underfunding as well as an exit premium assessed on employers that withdraw from a multi-employer plan. The Obama administration estimates that these policy changes would make the PBGC multi-employer program solvent through 2036. (Funds are current projected to run out in 2024.)
Another new proposal in the Obama budget opens up multiple-employer DC plans (MEPs, not to be confused with the multi-employer plans cited above) to any unrelated employer provided that the service provider promoting and administering the plan, the participating employers and the plan itself meet certain conditions — and make no mistake, there are conditions. The proposal would also clarify the applicable rules to facilitate pooled plans of self-employed individuals.
The budget includes President Obama’s perennial auto-IRA proposal which would require employers in business for two years that have more than 10 employees to offer an automatic payroll deduction IRA program to its employees. The proposal includes a small employer tax credit to help defray the costs of implementing an auto-IRA program and also triples the amount of the traditional small employer pension plan start-up credit for employers that may want to adopt a qualified retirement plan, SEP or SIMPLE plan. Another proposal expands coverage by requiring 401(k) plans to allow long-term part-time workers (defined as working at least 500 hours for three consecutive years) to make salary reduction contributions into the plan.
Other proposals affecting retirement plans in the budget include:
- Allowing long-term unemployed individuals to take penalty-free distributions from an IRA or qualified retirement plan.
- Permitting a plan to allow participant to take a distribution of a lifetime income investment through a direct rollover to an IRA or other retirement plan if the annuity investment is no longer authorized to be held under the plan.
- Exempting individuals from taking a required minimum distribution if the aggregate value of retirement savings do not exceed $100,000.
- Requiring holders of designated Roth accounts and Roth IRAs to take minimum distributions after age 70½
- Allowing all inherited plan and IRA balances to be rolled over within 60 days.
- Requiring non-spouse beneficiaries of deceased IRA owners and retirement plan participants to take inherited distributions within five years.
- Limiting Roth conversions to pre-tax dollars.
Albert Einstein once famously declared that insanity was doing the same thing over again and expecting a different result, and many of the retirement plan proposals here have been included in previous budgets to no practical effect.
It’s a budget already declared “dead on arrival” by the GOP-led Congress, of course — but it will give those of us in the retirement space something to talk about, for a little while longer at least.
Andrew Remo is the American Retirement Association’s Director of Congressional Affairs.