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By Kristen Ricaurte Knebel
Feb. 2 — President Barack Obama is once again aiming to limit contributions and accruals in tax-preferred retirement plans in his fiscal year 2016 federal budget.
The $4 trillion budget request, released Feb. 2, also put forth proposals to require certain employers to automatically enroll their employees in individual retirement accounts, going so far as to offer tax credits for small employers choosing to set up auto-enrollment or other kinds of retirement accounts. In addition, the budget addressed the impending insolvency of Social Security's Disability Insurance Trust Fund.
As in the FY 2015 budget, Obama proposed to cap contributions and accruals of additional benefits in tax-preferred retirement plans once individuals' balances are about $3.4 million, which would be enough to provide an annual income of $210,000, according to federal budget documents.
“The current law limitations on retirement contributions and benefits for each plan in which a taxpayer may participate do not adequately limit the extent to which a taxpayer can accumulate amounts in a tax-favored arrangement through the use of multiple plans,” according to the Treasury Department's Green Book.
Those accumulations can greatly exceed the amount of money needed to live comfortably in retirement and “are well beyond the level of accumulation that justifies tax-advantaged treatment of retirement savings accounts,” the spending plan said. Requiring taxpayers who have achieved those levels of savings to stop accumulating those funds in tax-favored accounts would reduce the deficit and “make the income tax system more progressive,” Obama's proposal said.
This is the second year in a row that caps on contributions to tax-favored retirement plans has been included in the federal budget, Kathryn L. Ricard, senior vice president for retirement policy at the ERISA Industry Committee, told Bloomberg BNA Feb. 2.
“Last year was the first year that the cap made it in the budget. We had a very strong reaction. We’re very opposed to caps. There are already limits in the tax code that restrict the amount that both the employer and the employee can put in to a tax-preferred savings account for retirement,” Ricard said.
She called the proposal “unnecessary, repetitive and complicated,” and said that it could make people think twice before putting their money in employer-sponsored retirement accounts or other tax-preferred accounts like IRAs.
Ricard said it can be frustrating for employers who sponsor retirement plans to have the rules changed on them every year because it can make the plans more complicated to administer.
The budget wish-list also proposed requiring employers with 10 or more employees who don't already offer a retirement plan to automatically enroll those employees in IRAs. This proposal has the potential to give 30 million more workers access to workplace retirement plans, according to the budget.
Employees would contribute to these plans via payroll deduction and employers wouldn't have to choose or arrange default investments for those employees, the Obama proposal said.
Obama also is aiming to expand tax credits for small employers choosing to set up auto-enrollment in IRAs, establish tax code Section 401(k) plans or other employer-sponsored retirement plans. Through this proposal, tax credits also would be available to employers that start automatically enrolling workers in already existing plans, according the spending plan.
Obama's plan also floated the idea of requiring employers with Section 401(k) plans to allow part-time workers who have been with the company for at least 500 hours per year for three years to make voluntary contributions to the plans.
Part-time workers who clock less than 1,000 hours each year often are barred from participating in employer-sponsored retirement plans, including being able to make contributions themselves, the budget said.
“Overall retirement savings could increase if more part-time employees were eligible at least to make section 401(k) salary reduction contributions under employer-sponsored plans, provided that the expansion was designed to avoid having the unintended effects of discouraging employers from sponsoring plans or prompting employers to limit hours or refrain from hiring part-time workers,” Obama's spending plan said.
In addition to employer-sponsored retirement plans, the budget took steps to preserve the Social Security system.
Obama is proposing to reallocate payroll tax collections between Social Security's Disability Insurance Trust Fund and the Old-Age and Survivors Trust Fund in an effort to combat the depletion of the DI Trust Fund and the overall projected insolvency of Social Security in 2033.
Proposals like this one aren't unprecedented and won't have an “effect on the overall health of the OASI and DI trust funds on a combined basis,” the budget said.
The House has already taken a stand against reallocating funds to the DI Trust Fund.
On Jan. 6, the House passed the rules package for the 114th Congress (H. Res. 5), including a provision that prohibits the House from considering legislation that would reduce the balance in the OASI Trust Fund unless it improves the solvency of the funds together.
Obama also is proposing to amend the Social Security Act to make all “lawfully married” same-sex couples eligible to receive Social Security spousal benefits, regardless of where they live.
Other proposals included in the spending plan that would affect retirement plans or savings include:
• reducing the value of itemized deductions to 28 percent, including retirement contributions and employer-sponsored health insurance;
• allowing plan participants to take an annuity distribution through a direct rollover to an IRA or other retirement plan if the investment is no longer authorized to be held by the plan—these distributions wouldn't be subject to the 10 percent additional tax on early distributions;
• exempting individuals from the minimum required distribution rules if the aggregate value of their IRAs and other tax-favored retirement accounts didn't exceed $100,000 on a measurement date; and
• allowing all inherited retirement plan and IRA balances to be rolled over within 60 days.
To contact the reporter on this story: Kristen Ricaurte Knebel in Washington at email@example.com
To contact the editor responsible for this story: Sue Doyle at firstname.lastname@example.org
Links to various administration budget documents are at http://www.whitehouse.gov/omb/budget/Overview. Text of the FY 2016 budget is at http://op.bna.com/pen.nsf/r?Open=krkl-9tcsfy. Treasury's Green Book is at http://op.bna.com/pen.nsf/r?Open=krkl-9tct4a.
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