February 24, 2015

How Will the White House Proposed Budget Affect Retirement Plans?

President Obama submitted his proposed 2016 fiscal year budget to Congress in early February, and retirement plans make several notable appearances in the proposal. The biggest (and most controversial) change proposed is the potential cap on lifetime contributions to tax-advantaged retirement plans, limiting plan balances to a maximum of $3.4 million. While the people nearing retirement age with retirement plan balances exceeding $3 million is small, over time, this new rule could potentially impact about 10 percent of 401(k) plan participants and IRA holders when you factor in inflation over time.

While the contribution cap imposes a limit on retirement saving, some of the other possible new rules are designed to make saving for retirement easier. Following are a few of the budget items retirement plan sponsors should keep an eye on.

Small employers

One significant item in the budget proposal would require certain small employers with more than ten employees who don’t sponsor a retirement plan to offer an automatic IRA. Employers who do offer a retirement plan but who exclude some employees from eligibility would have to offer automatic IRAs to those employees.

On the bright side, employers will be entitled to receive several tax credits for offering automatic IRAs, including credits for three years of start-up costs, and credits for enrolled employees. Additionally, those small employers who institute automatic enrollment in their retirement plans – whether a new or existing plan – will be eligible for a tax credit for up to three years.

Penalty-free withdrawals for unemployed

The budget proposes an expansion of the exception rules covering the 10% early withdrawal penalty. New rules would allow individuals to withdraw retirement funds free from the tax penalty if they have been unemployed for longer than 26 weeks, up to annual limits.

Part-time workers

In a bid to expand retirement plan coverage, the budget proposes a requirement that employers allow employees who work at least 500 hours per year for at least three years to be eligible to make elective contributions to their retirement plan. There is no requirement to add any employer contributions.

Annuities

The government is making moves to incentivize and encourage the use of annuities in an attempt to prevent retirees from outliving their assets. The budget proposal includes a provision that would improve annuity portability; in this rule, participants would be able to roll over a lifetime income investment to an IRA or other retirement plan if the annuity investment is no longer included in their plan. No distribution event has to occur, and the rollover would not be subject to an early withdrawal penalty tax.

Inherited Plan Rollovers

The budget proposal would allow non-spousal beneficiaries of retirement plans and IRAs to roll over those assets into another IRA within 60 days.

Budget proposals are the starting point for negotiations, so eventual enactment of a 2016 budget is likely to look quite different from the initial proposal.