President Obama’s final fiscal year 2017 budget proposal is a record
$4.1 trillion package that includes provisions to increase access to retirement
plans and portability of retirement benefits. The Obama administration released
details of the provisions in the Fiscal Year 2017 Revenue Proposals. Many of
the President’s retirement plan provisions were included in previous budget
proposals, although the administration included two new provisions in its final
budget proposal that are both aimed at increasing access to retirement plans.
One proposal would allow for the creation of open multiple employer plans
(MEPs) that would permit unaffiliated employers to offer benefits through a
single plan. Under current law, employers that participate in MEPs are often
employers that have some type of affiliation, such as belonging to the same
trade or business association. The administration’s proposal would eliminate this
“common bond” requirement.
Allowing unaffiliated employers to participate in a single MEP, which
would be treated as a single plan under the Employee Retirement Income Security
Act of 1974 (ERISA), would make it easier and less costly for small employers
to offer tax-qualified retirement benefits to their employees. The administration
believes that if it can reduce the complexities and costs associated with
maintaining a retirement plan, small businesses will be more willing to offer
retirement plans to their employees.
The administration’s other new proposal is intended to encourage state retirement
savings initiatives, such as the Illinois Secure Choice Savings Program. The
Department of Labor (DOL) has recently proposed regulations and guidance to move
forward with state-based retirement savings initiatives. To further encourage
these initiatives, the administration proposes to set aside $6.5 million to
allow a handful of states to pilot and evaluate state-based 401(k)-type programs.
All of the other retirement plan provisions in the President’s final budget
proposal were included in previous budget proposals. Following are the more
significant proposed provisions that would impact retirement plans.
Nonrefundable Start-Up Costs Tax
Credit
Small employers with 100 or fewer employees that adopt new qualified
retirement plans, SEPs, or SIMPLEs would be eligible for an annual tax credit
of up to $1,500 per year for three years. This tax credit for start-up costs
would not be applicable to employers that offer an automatic IRA arrangement.
Also proposed is that this credit be extended to four years for any
employer that adopts a new qualified retirement plan, SEP, or SIMPLE during the
first three years of offering (or being required to offer) an automatic IRA
arrangement.
Auto Enrollment Tax Credit
Small employers that adopt new qualified retirement plans that include
an auto enrollment feature or add an automatic enrollment feature to an
existing plan would be allowed a tax credit of $500 per year for three years.
The auto enrollment tax credit would be in addition to the start-up costs
credit.
Penalty-Free Withdrawals for
Long-Term Unemployed Individuals
Long-term unemployed individuals would be permitted to take distributions
of up to $50,000 per year for two years from IRAs, 401(k) plans, and other
tax-qualified defined contribution plans, with certain amounts to be excluded
from the 10 percent early distribution penalty tax. The penalty-free distributions
could not exceed 50 percent of the aggregate IRA, 401(k), and other tax‑qualified
defined contribution plan balances, subject to an exception for the first
$10,000 of otherwise eligible distributions.
Certain Part-Time Workers to
Participate
Employers would be required to expand 401(k) plan participation
eligibility rules, by permitting part-time employees to participate in the plan
if the employee has worked at least 500 hours per year with the employer for at
least three consecutive years. The provision would not require the employer to
make matching contributions.
Annuity Portability
Plans would be permitted to allow participants to take a distribution
of a lifetime income investment through a direct rollover to an IRA or other
qualified retirement plan if the annuity investment is no longer authorized to be
held under the plan. The distribution would be allowed without regard to
another triggering event that would permit a distribution.
Nonspouse Beneficiary Rollovers
to Inherited IRAs
The options available to a nonspouse beneficiary under an
employer-sponsored retirement plan or IRA for moving inherited plan or IRA
assets to an inherited IRA would be expanded to allow 60-day rollovers (i.e.,
indirect rollovers) of such assets.
Deductibility of Retirement
Savings Plan Contributions
The tax value of specified deductions or exclusions from taxable
income, including those for IRAs and retirement plan contributions, would be
reduced to a maximum of 28 percent instead of allowing taxpayers to exclude the
contributions from the full 33 percent, 35 percent, or 39.6 percent that they
would otherwise owe. Taxpayers in the 28 percent and lower brackets would be
unaffected. This same provision also would limit the tax value of contributions
made by these upper income taxpayers to health savings accounts and Archer
medical savings accounts.
Cap on Tax-Advantaged Retirement
Savings Plan Accumulations
Contributions to tax-advantaged retirement savings plans (such as IRAs,
401(a) plans, 403(b) plans, and funded 457(b) governmental plans) would be
prohibited for individuals who have accumulated assets past a certain
threshold. That threshold is the amount necessary to provide the maximum
annuity permitted for a tax-qualified defined benefit plan (for 2016, an annual
benefit of $210,000). Currently, the maximum permitted accumulations for an individual
age 62 is approximately $3.4 million.
Limit Payout Options for
Nonspouse Beneficiaries
Nonspouse beneficiaries of retirement plans and IRAs would be required
to take distributions over a period of no more than five years. Under current
law, depending on the original IRA owner’s date of death and whether there is a
designated beneficiary under the plan, a nonspouse beneficiary generally may be
able to take payments over her own life expectancy. Certain exceptions would be
made for nonspouse beneficiaries who are disabled, chronically ill, minors, and
are not more than 10 years younger than the account owner.
Roth Conversions
Roth conversions would be limited in that only taxable assets in IRAs and
qualified retirement plans would be eligible for rollover or conversion to Roth
IRAs. This provision is designed to limit individuals who do not qualify for a
Roth IRA from making nondeductible contributions to Traditional IRAs and then
converting the assets to a Roth IRA.
No RMDs for Some Taxpayers
RMDs would be eliminated if the aggregate value of an individual’s IRA
and other tax-favored retirement plan accumulations does not exceed $100,000 on
a measurement date. The RMD requirements would phase in ratably for individuals
with aggregate retirement benefits between $100,000 and $110,000.
Employer Reporting of Defined
Contribution Plan Contributions
Employer contributions to defined contribution plans would be required
to be reported on Form W-2, Wage and Tax Statement.
Cost-of-Living Adjustments
To avoid declines in the cost-of-living adjustments, the adjustments would be modified to prevent deflationary adjustments.
NUA Tax Treatment
The special net unrealized appreciation (NUA) tax treatment applicable
to employer securities would be eliminated. This special tax treatment
currently allows employer securities to be distributed and retained by the
participant, with the participant paying current tax on the cost basis and
later paying tax on the gain of the security at the capital gains rate.
Chance of Becoming Law
In the final year
of a two-term lame-duck presidency, chances that the President’s budget will be
adopted as proposed are slim to none, although the White House has expressed
hope that they can obtain bipartisan support for a number of the President’s
initiatives.
