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Obama Administration 2015 budget: Retirement Provisions

On February 2, 2015 the Administration released its 2016 fiscal year budget. The 2016 budget includes a number of proposals affecting retirement plans. In this article we briefly review those proposals.

New this year

Many of the Administration’s proposals have been included in prior budgets. Some, however, are new, and we begin with those.

Encourage state retirement plan initiatives. The Administration is proposing spending $6.5 billion “to assist in the start-up of retirement savings programs in states” and also is requesting that DOL be authorized “to grant a temporary waiver of the preemption provisions of [ERISA]” for these state programs. We recently discussed the Illinois retirement plan initiative in our article Expanding coverage — Illinois Secure Choice Savings Program and the DOL myRA letter. Not surprisingly, the Administration would likely support the development of state programs.

The proposal of a temporary waiver of ERISA’s preemption provision is interesting. As we discussed in our earlier article, preemption is one of the two big federal issues facing the state retirement plan initiative (the other issue being whether ERISA, including, e.g., ERISA’s fiduciary rules, covers state plans).

Tax credit for small employers who set up a plan or Auto-IRA. As discussed in our recent article Administration 2015 retirement savings proposals, the Administration is proposing to triple (to $4,500) the small employer plan start-up credit and provide a $3,000 credit for setting up an Auto-IRA. Small employers who add auto-enrollment to a retirement plan would be eligible for a tax credit of $1,500.

Expanding coverage of part-time employees. Again as discussed in our earlier article, the Administration is proposing that current participation rules be amended to require inclusion in a plan of part-time employees who work at least 500 hours per year for 3 years. Employers would, however, “receive nondiscrimination testing relief” – so, presumably, these part-time employees would not be included in, for instance, actual deferral percentage (ADP) testing.

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Now let’s briefly review the proposals that were also included in the 2015 budget:

Increase in PBGC premiums. The Administration proposes that the Pension Benefit Guaranty Corporation be given authority to set premiums for both the single and multiemployer insurance programs. According to the Administration, this proposal will save an estimated $19 billion over 10 years. That is a decrease from last year’s $20 billion request. PBGC already got, in the end-of-last-year ‘Cromnibus’ legislation, $1 billion of the $20 billion it wants.

$3.4 million cap on retirement benefits. The Administration proposes that:

A taxpayer who has accumulated amounts within the tax-favored retirement system (i.e., IRAs, section 401(a) plans, section 403(b) plans, and funded section 457(b) arrangements maintained by governmental entities) in excess of the amount necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan under current law (currently an annual benefit of $210,000) … would be prohibited from making additional contributions or receiving additional accruals under any of those arrangements.

The value of this $210,000 a year annuity benefit is estimated by the Administration to be the $3.4 million.

This proposal has been in the last two budgets. Many view the inclusion of defined benefits in this ‘benefits cap’ as presenting a difficult, if not unsolvable, administrative problem. Some in Congress have advocated a simpler cap on IRAs and defined contribution benefits only.

Reduce the value of itemized deductions and other tax preferences to 28%. The Administration proposes limiting to 28% the tax value of certain deductions and exclusions, including employee contributions to defined contribution retirement plans and individual retirement arrangements. For taxpayers at a higher marginal tax rate – 33%, 35% or 39.6% – this would in effect be a tax (5%, 7% or 11.6%) on otherwise untaxed contributions. The taxpayer would get basis to reflect that additional tax. This 28% ‘deduction cap’ would not apply to defined benefit plans.

Automatic workplace pensions. As in last year’s budget, the Administration is proposing that employers with more than 10 employees that have been in business for at least two years be required to offer an ‘automatic IRA’ – a payroll deduction IRA into which participants would be defaulted (at a 3% contribution rate), subject to an opt out. Employers that provide a qualified plan would not be subject to this requirement, except with respect to groups of employees (e.g., at a division or subsidiary) that are not covered under any plan.

This proposal, or a similar one, has been in every budget proposed by this Administration, and ‘Auto-IRA’ bills have been introduced in the past. As we said in our article Administration 2015 retirement savings proposals, however, because of tight budgets and concerns about ‘mandates,’ it has gotten little support.

Other provisions. The Administration would also:

Repeal the deduction for dividends paid with respect to employer stock held by an ESOP that is sponsored by a publicly traded corporation.

Eliminate stretch-IRA treatment (including ‘stretch’ payments under defined benefit plans).

Eliminate required minimum distributions (RMD) for balances of $100,000 or less. The rules for RMDs would also be simplified somewhat.

Expand penalty-free withdrawals for long-term unemployed.

Simplify (and ease) rollover rules for non-spouse beneficiaries.

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While some have said that this budget is ‘purely partisan,’ we should keep in mind that (former) Republican House Ways and Means Committee Chairman Dave Camp included in his 2014 tax reform proposal something like the 28% deduction cap. That proposal also would have eliminated stretch IRAs (and stretch payouts generally).

Thus, even though the Republican Congress may reject this budget as a whole, the retirement savings-related ideas and proposals it includes will not necessarily go away, and some may have bipartisan support.

We will continue to follow these issues.

 

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