President Barack Obama's proposed $3.9 trillion fiscal year 2015 budget includes requirements that employers offer individual retirement accounts and provisions that would reduce tax benefits on certain retirement accounts for high-income earners.
The tax provisions, part of the budget plan released March 4, would cap how much Americans could accumulate in tax-preferred retirement savings, putting a ceiling of about $200,000 on the annual retirement income that could be generated by such savings. This proposal would generate an estimated $28 billion in savings, which would go toward the Opportunity, Growth and Security Initiative, a road map to Congress that budget documents say aims to strengthen investments in the nation's future.
“Tax-preferred savings accounts were intended to help middle class families save for retirement. However, under current rules, some wealthy individuals are able to accumulate millions of dollars in these accounts, substantially more than is needed to ensure a secure retirement,” according to an administration document on the initiative.
The budget would give a financial boost to other forms of retirement savings, providing incentives for low-income Americans to save and to small employers for offering retirement plans to workers. It also included a proposal from the president's budget plans of previous years, the establishment of automatic enrollment IRAs, which aims to give every American access to an automatic savings vehicle on the job.
The budget, including proposed changes to enhance retirement security, is not expected to pass through Congress, said Edward S. Karl, vice president of taxation for the American Institute of CPAs.
“Last year was a contentious year, and I don't think things will be much better in an election year,” he said in an interview.
Options for Retirees
The budget plan builds on Obama's earlier proposals to improve retirement security for Americans who don't have a savings option. His proposal includes the MyRA savings bond, first unveiled during his January State of the Union address. MyRAs would require only a low initial contribution from savers and guarantee a “decent return” with no risk of losing what was contributed, Obama said in a message to Congress released with the budget plan.
The budget also addressed Social Security, urging the House to pass an immigration overhaul that budget documents said would reduce the program's shortfall by $300 billion over the first 10 years and would close 8 percent of the 75-year Social Security shortfall by adding younger workers to the workforce.
The president stressed a need for additional federal revenue for the nation to maintain its commitments to seniors while making investments to expand the economy.
“The budget secures that revenue through tax reform that reduces inefficient and unfair tax breaks and ensures that everyone, from Main Street to Wall Street, is paying their fair share,” Obama said in his message to Congress.
Obama's budget, if approved, would provide support for retirement savings options, including funding for his newly created MyRA program and a Social Security revamp.
Low-income taxpayers and other workers unable to participate in employee-sponsored savings programs would find a savings vehicle in MyRAs, savings accounts tailored to individuals who contribute small amounts. The accounts would guarantee a “decent” return with no risk of losing contributed funds, budget documents said. MyRAs would be available through employers.
When Obama unveiled the MyRA proposal, he stressed the importance of aiding workers by providing options that were simple, safe and affordable. The MyRA accounts, which would operate similar to Roth IRAs, are “starter” accounts that were created through the Treasury Department after President Obama issued an executive order.
Offering workers the opportunity to invest in a MyRA account would be completely voluntary for employers. The accounts would pose “little to no cost” to businesses and would be easy for them to offer because employers would not be administering the accounts or contributing to them, the administration said in an earlier fact sheet on the program.
Few employers have adopted automatic payroll deduction IRAs despite the effort of government agencies to promote the options as a viable savings plan, the Treasury Department said in a document explaining the budget plan's revenue proposals.
To combat employer reluctance to adopt auto IRAs, the department said, the proposal provides and expands tax credits to small employers that offer them.
The expansion would involve the “start-up costs” tax credit, which is available to small employers—defined as employers with no more than 100 employees—for those that adopt a new qualified retirement plan, simplified employee pension (SEPs) or SIMPLE plan.
As for the automatic IRA proposal itself, it would require employers with more than 10 employees that have operated for at least two years to offer employees an option to participate.
Employers would provide workers with a standard notice and election form that would give information about the automatic IRA option and the possibility to opt out or adjust contribution rates. Employees would have payroll deductions made by direct deposit to a financial institution of their choice and into either a traditional or Roth IRA.
But the budget documents say that employers wouldn't have to choose or arrange default investments, make contributions, comply with qualified plan requirements or face liability or responsibility for determining employee eligibility.
No ‘Chained' CPI Proposal
The proposal doesn't include a controversial provision on Social Security that the president offered in his FY 2014 budget plan: changing the measure used to calculated the program's cost-of-living adjustments to the “chained” consumer price index.
The chained CPI, which would shrink COLAs, was included in the 2014 proposal as a potential compromise between the Obama administration and congressional Republicans concerned about long-term debt and deficits. But this provision, the president's new budget plan said, was not included this year because of Republicans' “unwillingness to negotiate on fundamental issues and agree to a balanced plan to deal with our long-term fiscal challenges.”
Excerpted from a story that ran in Pension & Benefits Daily (3/4/2014).
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