Proposed IRA Changes Focus on Small Business and Middle Class Taxpayers

In the weeks since the Obama Administration released its 2014 Fiscal Year Budget Proposal, much attention has been paid to the proposed cap of $3 million on IRAs and employer plans, and the reduced tax incentives for higher-income taxpayers in order to raise $9 billion of additional revenue over the next 10 years.

These proposals, if enacted, could have a dramatic impact on IRAs and employer plans, similar to the downturn in IRA activity that resulted from the Tax Reform Act of 1986, which placed limits on IRA deductibility for certain individuals covered by employer plans. Almost unnoticed in the Obama budget proposal are a number of other provisions that are targeted to small business and middle class taxpayers that would have a more immediate impact on credit union IRA programs.

One of these proposals would create an automatic IRA option for individuals not covered by an employer plan.

More than half of the American workforce currently lacks access to employer-based retirement plans, and while most are eligible to make IRA contributions, few take the initiative to establish and contribute to an IRA.

To increase participation, the Administration’s proposal would require employers in business for at least two years that have 10 or more employees to offer an automatic IRA option. Employers sponsoring a qualified retirement plan, SEP, or SIMPLE IRA plan would not be required to offer an automatic IRA option. Under the Administration’s proposal, regular contributions would be made to an IRA on a payroll-deduction basis. The employer’s role would be to facilitate employee contributions using its existing payroll-deduction system, but no employer contributions would be required.

Employers offering automatic IRAs would provide employees with a standard notice and election form informing them of this option. Employees could then elect to participate or opt out. Employees who do not provide a written participation election would be automatically enrolled and have three percent of their compensation deposited to an IRA.

The employer could designate a single IRA trustee or custodian to hold all employee contributions, or if preferred, could allow each employee to select the IRA trustee or custodian.

Another Administration proposal would eliminate required minimum distributions (RMDs) if the aggregate value of an individual’s IRA and employer plan accumulations does not exceed $75,000 on a measurement date. The RMD requirements would phase in ratably for individuals with aggregate retirement benefits between $75,000 and $85,000. The initial measurement date would be the beginning of the calendar year in which the individual reaches age 70½ or, if earlier, in which the individual dies.

Even though Roth IRAs are not subject to RMDs while the IRA owner is living, any Roth IRA balances would be included for purposes of determining whether the individual’s aggregate value of IRAs and employer plans exceeds the $75,000 threshold. However, any benefits under defined benefit pension plans that have already begun to be paid in life annuity form would be excluded.

The Administration has also proposed to expand the options that are available to a nonspouse beneficiary under an employer plan or IRA for moving inherited plan or IRA assets to an inherited IRA by allowing 60-day rollovers of such assets.

Under current law, a nonspouse beneficiary can only move assets from an employer-sponsored retirement plan to an inherited IRA by means of a direct rollover, or from an IRA to an inherited IRA by means of a trustee-to-trustee transfer. If the nonspouse beneficiary receives the assets from the employer plan or IRA, the assets cannot be rolled over to an inherited IRA, and represent taxable income to the beneficiary. The current rules often result in costly tax consequences to IRA beneficiaries who are not familiar with the rules and the steps necessary to move the IRA assets to an inherited IRA.

Another proposal would require greater electronic filing of information returns. The IRS provides filers with different methods to file information returns, including filing paper returns or filing electronically. To encourage greater electronic filing of information returns, the Administration has proposed expanded regulatory authority to allow a reduction in the 250-return electronic filing threshold. Under the current rules, IRA trustees and custodians that file fewer than 250 Forms 1099-R or 5498 are allowed to file on paper.

Any of these proposals, if enacted, would have an immediate impact on credit union IRA programs. However, the President has proposed most of these initiatives in prior budget proposals and they have not become law. The Administration’s budget proposal is the President’s wish list, but the House and Senate have passed their own budget proposals, which are markedly different from each other and the President’s proposal. Only time will tell if any of these proposals become law.

Dennis Zuehlke is Compliance Manager for Ascensus in Middleton, Wisconsin. Mr. Zuehlke provides clients with technical support on tax-advantaged accounts (including individual retirement accounts, health savings accounts, simplified employee pension plans, and Coverdell education savings accounts), and information reporting and tax withholding issues. Mr. Zuehlke is a frequent national speaker on compliance-related issues and retirement savings trends within the financial services industry.

Mr. Zuehlke attended Marquette University and graduated from the University of Wisconsin. Prior to joining Ascensus, he held a similar position with the Credit Union National Association.

Ascensus delivers a full range of retirement plan services—including plan administration, plan design and maintenance, consulting, web-based tools and content, software solutions, education and training, forms and documents, and technical resources—to more than 9,000 financial organizations nationwide.

Dennis Zuehlke

Dennis Zuehlke

Dennis is Compliance Manager for Ascensus. Mr. Zuehlke provides clients with technical support on tax-advantaged accounts (including individual retirement accounts, health savings accounts, simplified employee pension plans, and Coverdell education ... Web: Details