From policy matters to financial concerns, there are plenty of areas of debate regarding President Obama’s latest 2014 budget proposal. There are several areas that specifically could affect plan sponsors and their participants.
The largest and most glaring proposed item would limit the deduction or exclusion for contributions to 401(k) and 403(b) contribution plans, defined benefit pension plans, and IRAs for those whose accrued benefits would provide an annual income of $205,000. In other words, if the budget is passed, which is highly unlikely, a significant chunk of earned income that once would have been protected from taxation would now be subjected to it.
If the contribution limit were to be enacted today, retirement accounts would be limited to approximately $3.4 million. However, this number would fluctuate based on interest rates and inflation. If interest rates rise, the cap can potentially fall as low as $2.2 million. At the $3.4 million limit, only 0.9% of 401(k) accounts would be impacted, as predicted by the EBRI. If the cap went down to $2.2 million, however, the number of those affected would jump to 3% of all 401(k) accounts.
The proposed limit is expected to generate around $9 billion over the next ten years, but some critics of the plan suggest that small business owners might grow discouraged from offering retirement plans in the first place, since the plan removes one of their personal incentives to keep them. We don’t necessarily believe it would lead to an immediate discontinuance of a large number of retirement plans. It is more likely we would see a rise in Non-Qualified plans to supplement the Qualified plans.
The President’s proposal also revives the so called Automatic IRA program. Under the program, employers who have more than ten workers and don’t already offer retirement plans would be required to enroll their workers in direct-deposit IRAs. Businesses that provide retirement plans but exclude some employees would also be forced to establish automatic IRAs for those employees.
This idea has been floating around Congress for years, with varying degrees of support. Aside from creating a booming business for the countries financial providers, and an administrative nightmare for employers (something this Administration is not afraid to do), this proposal is not entirely a bad idea – in theory. In practice, however, it won’t work.
The problem with American’s retirement savings is that, well, American’s are terrible at saving money. Further, we’re now more sure than ever that Social Security won’t be the whole answer for most people.
So the obvious answer is that we need to encourage people to save more money for their retirement “ and on its face, this proposal would do that. Unfortunately, while the employer is required to open the IRA account for the employee, neither the employer nor the employee is required to contribute to it. Even if they were required to contribute, what about the vast majority of American’s who are covered by 401(k) plans? They are currently not required to contribute to their plan, so we haven’t really solved the problem.
Of course, a proposed budget is far from a signed, sealed and delivered budget, especially in today’s political climate. In fact, Congress has not technically passed a budget in more than 3 years, so for the time being, it’s largely an academic discussion. We will continue to monitor all legislative activity that could affect you and your plan and will keep you updated.