Tuesday, June 28, 2016

President Obama’s 2017 budget proposal has several potential effects on retirement

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 taxqualified 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.