President’s final budget proposal promotes increased access to retirement plans

President Obama’s final fiscal year budget proposal is a record $4.1 trillion package that includes provisions to increase access to retirement plans and portability of retirement benefits.

Many of the President’s retirement plan provisions in his final budget proposal were included in previous budget proposals but were not acted upon, reflecting the difficulty that the Obama administration has had in moving retirement plan legislation through Congress. The Obama administration included two new provisions in its final budget proposal, both aimed at increasing access to retirement plans.

One proposal would allow for the creation of open multiple employer plans that would permit unaffiliated employers to offer benefits through a single plan. Under current law, employers that participate in multiple employer plans 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 multiple employer plan, 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 consistent with ERISA regulations. 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 and automatic enrollment IRAs.

All of the other retirement plan provisions in the President’s final budget proposal were included in previous budget proposals. Following are the major provisions that would affect IRAs.

Required Minimum Distributions for Roth IRAs

Roth IRAs would be subject to the same required minimum distribution (RMD) rules as Traditional IRAs. The proposal would require IRA owners to begin receiving RMDs from Roth IRAs in the year that they attain age 70½ and would no longer permit Roth IRA contributions after reaching age 70½.

Automatic IRA Program

Employers in business for at least two years that have 10 or more employees would be required to offer an automatic IRA option. Employers sponsoring a qualified retirement plan, simplified employee pension (SEP) plan, or savings incentive match plan for employees of small employers (SIMPLE) plan would not be required to offer an automatic IRA option. Under the administration’s proposal, annual contributions would be made to the IRAs on a payroll deduction basis. Employers would facilitate employee contributions using their existing payroll deduction systems, but no employer contributions would be required.

Deductibility of Retirement Savings Plan Contributions

Another administration proposal would limit the tax value of specified deductions or exclusions from adjusted gross income and all itemized deductions.

The tax value of the exclusion for employee contributions would be reduced to a maximum of 28 percent for defined contribution retirement plans and IRAs 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.

Limited 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 may be able to take payments over his or her own life expectancy.

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.

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.

Other Provisions

Other provisions in the administration’s budget proposal would cap tax-advantaged retirement savings plan accumulations, expand penalty-free withdrawals from tax-qualified plans and IRAs for long-term unemployed individuals, limit Roth conversions to pretax dollars, and modify the cost-of-living adjustments to prevent deflationary adjustments.

Chance of Becoming Law

The prospect for passing any of the President’s retirement savings proposals looks dim. The general consensus is that the Obama administration budget was dead on arrival on Capitol Hill, but the White House has expressed hope that it can obtain bipartisan support for a number of the President’s initiatives.

That may be difficult with Republicans in control of both houses of Congress and the President’s lame-duck status, and given that many of his retirement savings proposals were included in previous budget packages and were not acted upon. Add that it’s a presidential election year with a highly polarized electorate, the prospect of a long drawn-out primary season for both parties with potential implications for down-ballot races, and a Supreme Court vacancy thrown in for good measure and it may be nearly impossible. Stay tuned.