The President’s 2015 budget and retirement benefits

On March 4, 2014 the Obama Administration released its 2015 fiscal year budget. The retirement benefits-related provisions of the 2015 budget are generally similar to those in the 2014 budget. In this article we briefly review them.

Increase PBGC premiums

Even after two rounds of premium increases since 2012, the Administration continues to propose that the Pension Benefit Guaranty Corporation be given authority to set premiums. According to the Administration, “[t]his proposal is estimated to save $20 billion over the next decade.” So, clearly, the PBGC thinks premiums are still too low.

Prohibit individuals from accumulating over $3.2 million in tax-preferred retirement accounts

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 … would be prohibited from making additional contributions or receiving additional accruals under any of those arrangements.”

The Administration estimates that, currently, this benefit (the lump sum value of the current DB annual benefit limit of $210,000) would equal an account balance of approximately $3.2 million.

This is similar to last year’s proposal (with some minor adjustments). The administration of this program remains a challenge. Many believe that a simpler and more manageable approach would be to simply limit IRA and defined contribution account balances and not undertake, as the Administration proposes, the complicated task of reporting, valuing and aggregating DB, DC and IRA benefits/balances.

Reduce the value of itemized deductions and other tax preferences to 28 percent

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’s basis would be adjusted to reflect the additional tax imposed.

We discuss the tax effect of this sort of proposal in detail in our article What would a 28% deduction cap mean for 401(k) tax benefits? We note that this 28 percent ‘deduction cap’ would not apply to defined benefit plans.

Automatic workplace pensions

“The proposal would require employers in business for at least two years that have more than ten employees to offer an automatic IRA option to employees, under which regular contributions would be made to an IRA on a payroll-deduction basis.”

This proposal, or a similar one, has been in every budget of this Administration, and ‘Auto-IRA’ bills have been introduced in the past. The proposal bears some resemblance to Senator Harkin’s (D-IA) USA Retirement Funds proposal. It requires employers that do not provide a qualified plan or that have groups not covered by a plan, to automatically enroll employees (at 3% of pay) in a payroll deduction IRA contribution program.

An interesting feature of this year’s proposal: unless the employee elected otherwise, the IRA would be a Roth IRA. One of the biggest obstacles to the adoption of an auto-IRA is its cost. ‘Roth’ treatment would reduce that cost, since a large portion of the tax benefit would fall outside Congress’s 10-year budget scoring window.

Other provisions

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). (We review this issue in our article Senators target ‘stretch’ payouts of retirement benefits for elimination.)

Eliminate age 70-1/2 required minimum distributions for balances of $100,000 or less.

Give IRS authority to require electronic filing of certain employee benefit plan tax information.

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While, in the current divided government, there is little chance that this budget will be adopted, some of these proposals may be included in viable legislation. Example: last year saw an increase in PBGC premiums – not exactly what the Administration asked for (in its 2014 budget), but a step in that direction.

The elimination of stretch IRAs (and stretch payouts generally) was also included in Congressman Camp’s comprehensive tax reform proposal. That proposal also included something like the 28% deduction cap.

So, while many will declare this budget dead on arrival, the ideas it includes will not necessarily go away and may have bipartisan support.

We will continue to follow these issues.