President’s budget retirement proposals: Few new, many repeats
As expected, President Barack Obama’s fiscal year 2017 federal budget proposal, released on Feb. 9, 2016, includes many retirement-related items. While most ideas are repeats from past budgets, some of which have been slightly tweaked, several new provisions debuted this year.
Here’s a brief recap of the new and old.
New provisions
Open MEPs. This proposal, which enjoys bipartisan support, would permit unaffiliated employers to adopt a defined contribution multiple-employer plan (MEP) that would be treated as a single plan for purposes of ERISA, regardless of whether the participating employers have a commonality of interests or a relationship unrelated to the provision of benefits. The plan provider that promotes and administers the plan, the participating employers and the plan itself would have to meet certain conditions.
Pension Benefit Guaranty Corporation (PBGC). While stating the administration’s view that “additional increases in single-employer premiums are unwise at this time,” the proposal asks that the PBGC — the federal agency that “backstops” defined benefit pension plans — be given discretion to raise $15 billion in additional premium revenue from multi-employer plans.
Innovation grants for portable, multiple-employer benefits pilots. The administration would provide $100 million to the Department of Labor to finance pilots that design, implement and evaluate new approaches to expanding retirement coverage and other employer benefits, using the proposed open MEP structure or other existing structures. Grantees would be states or nonprofit organizations.
Repeat provisions
Automatic IRAs. Any employer with more than 10 employees that doesn’t sponsor a retirement plan and has been in business for at least two years would be required to automatically enroll its workers in a payroll-deduction IRA. Auto IRAs would let workers opt out. The auto IRA proposal would provide an employer with a tax credit of up to $3,000.
Tax credits . The president also proposed tripling the “start-up” credit, allowing small employers that begin offering a retirement plan to receive a tax credit of up to $4,500. Small employers that already offer a plan and add auto enrollment would get an additional tax credit of up to $1,500.
Retirement savings cap. Under the controversial retirement savings cap idea, retirement savings above the cap wouldn’t be tax deferred once combined defined benefit (DB) and defined contribution (DC) assets reach $210,000 annually. That would mean a $3.4 million cap on tax-deferred retirement savings, based on current interest rates. The limits would be reset each year based on interest rates, actuarial tables and other assumptions. According to retirement industry groups, this proposal would create a disincentive for retirement savings, as well as compliance issues for plan sponsors and retirement savers alike.
Reduction on the value of itemized deductions to 28%. According to the American Society for Pension Professionals and Actuaries (ASPPA), under this “double taxation” proposal, small business owners and others in the top three income tax brackets (33%, 35% and 39.6%) would have to pay tax on retirement plan contributions in the year the contributions are made and then pay tax at the full rate when contributions are distributed at retirement. ASPPA observes that this would likely discourage small business owners from maintaining 401(k) plans.
Expansion of penalty-free withdrawals for long-term unemployed. T his provision would expand the 10% early withdrawal penalty exception to cover more distributions to long-term unemployed individuals from an IRA, 401(k) or other tax-qualified defined contribution plans. Certain restrictions would apply.
Participation of long-term, part-time workers in retirement plans. 401(k) plans would be required to expand plan eligibility for elective deferrals to employees that worked with the employer at least 500 hours per year for at least three consecutive years.
Facilitation of annuity portability. The proposal would permit a plan to allow participants 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, without regard to whether another event permitting a distribution has occurred. The distribution wouldn’t be subject to the 10% early withdrawal tax.
Simplification of required minimum distribution (RMD) rules. An individual would be exempt from the RMD requirements if the aggregate value of the individual’s IRA and tax-favored retirement plan accumulations doesn’t exceed $100,000 as of a certain measurement date.
Application of RMDs to Roth accounts. Under the guise of simplification, the proposal would also “harmonize” the RMD rules between Roth and traditional retirement accounts. This would initiate RMDs for those with Roth IRAs and Roth employer retirement plans on reaching age 70½. It would also likely prevent additional contributions to Roth retirement accounts after age 70½.
Indirect rollover of inherited IRA and plan balances. The administration proposes to permit non-spouse beneficiaries of IRAs or qualified plans to roll over balances to inherited IRAs by indirect (60-day) rollover. This proposed change is intended to harmonize the rules for spousal and non-spousal beneficiaries.
Non-spouse beneficiaries. Non-spouse beneficiaries of retirement plans and IRAs would be required to take inherited distributions over no more than five years, eliminating the so-called “stretch IRA.” Certain exceptions would be provided for eligible beneficiaries; for example, the five-year rule wouldn’t apply to beneficiaries who are minor children, disabled or chronically ill or those who are no more than 10 years younger than the decedent.
Limitation of Roth conversions to pre-tax dollars . The proposal would prohibit the conversion of after-tax or non-deductible contributions held in traditional IRAs or plans to a Roth IRA. Only pre-tax amounts could be converted to Roth. This would eliminate the so-called “back-door Roth IRA.” It would also eliminate the ability to direct a rollover of after-tax amounts in a plan to a Roth IRA, as currently permitted under IRS Notice 2014-54.
Requirement for W-2 reporting for employer contributions to DC plans. The administration proposes to require employers to report amounts contributed by the employer to an employee’s DC plan accounts on Form W-2, just as they are already required to report an employee’s elective deferrals to a retirement plan on Form W-2.
Net unrealized appreciation. The proposal would repeal the exclusion of net unrealized appreciation in employer stock in the year of a distribution for participants in tax-qualified retirement plans who aren’t age 50 as of Dec. 31, 2016. Participants who turn 50 on or before Dec. 31, 2016, wouldn’t be affected.
Please keep in mind this apt observation from my colleague, Director of Retirement Business Strategy Tom Rowley: Only those proposals that actually become law affect citizens. With the Republican-controlled Congress, the President’s budget is unlikely to advance, although some proposals could be — and have been — included in other proposed legislation.
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Jon Vogler Senior Analyst
Retirement Research, Invesco Consulting
Senior Analyst Jon Vogler draws on extensive pension expertise to offer retirement thought leadership for Invesco. In addition to writing Invesco’s Retirement blog, he tracks legislative and regulatory developments and contributes as a writer and editor to a variety of retirement-related Invesco communications.
Prior to joining Invesco in 2008, Jon spent more than 25 years in the research, writing, compliance and underwriting areas of the retirement services industry, including roles as a senior consultant at Mutual Benefit Life’s pension consulting firm and as a compliance manager in the Automatic Data Processing retirement services division.
Jon earned the Fellow, Life Management Institute (FLMI) and Competent Toastmaster (CTM) designations. He has a B.A. in History from Rutgers, The State University of New Jersey.
