No matter whom the occupant of the White House happens to be, that person seems bound to please some, while displeasing others. This is the case with just about any decision or proposal made by the Chief Executive. It was certainly the case when President Obama’s 2014 fiscal year budget proposal was released, and it became evident that it would break some new ground with respect to retirement savings provisions.
The president’s proposal of a dollar cap on tax-advantaged retirement accumulations, and also a limit of 28 percent on any taxpayer’s benefit for income tax deductions and exemptions, were immediately criticized as hostile to the goal of saving for retirement. Like many others, we were not especially pleased with these proposals, as they seemed to be a changing of the rules while the game is in progress. However, the president’s 2014 budget contained a number of other provisions that could affect retirement saving, provisions that merit comment, too. Here are our thoughts on some of them.
§ An automatic-enrollment workplace IRA program would be required of most employers that sponsor no retirement plan, that have been in business for two or more years, and have 10 or more employees. The proposal includes a start-up credit for employers with 100 or fewer employees. Traditional or Roth IRAs could be used, with a Roth IRA proposed as the default. Some may see this as potentially siphoning off true “qualified plan” business, but to the extent that more workers at least begin saving in preparation for retirement, the industry and the nation as a whole benefit. And, such a program could eventually lead an employer to establish a more traditional retirement plan.
§ Required minimum distributions would be waived for persons with aggregate IRA and employer plan balances that do not exceed $75,000. This could be beneficial to many retirees who have other assets to help support them in retirement, and who want to preserve tax-deferred amounts until they are actually needed.
§ Nonspouse beneficiaries would be allowed indirect rollovers between retirement plans and IRAs, and between IRAs. “Inherited IRA” status would remain a requirement. In the past, the inability of nonspouse beneficiaries to execute an indirect rollover has been a trap that has caught—and cost—many. An indirect rollover option would also allow nonspouse beneficiaries to “split” pre-tax and after-tax portions of inherited employer plan accounts when rolling them to inherited IRAs, something they now cannot do because of the present nonspouse beneficiary direct rollover requirement.
§ The maximum small employer retirement plan start-up credit would double from $500 to $1000 per year, and would be available for four years instead of three. Anything that encourages employers to establish new plans, including tax credit incentives, is worthy of consideration.
§ Electronic capture of employer plan data could be expanded. A provision of the president’s budget proposal would authorize the IRS to require that nondiscrimination testing data be included on electronically-filed Form 5500 plan returns. The IRS seems intent on identifying retirement plans that have potential noncompliance issues, and requiring the annual submission of testing data would seem to be a step in that direction. It would, at minimum, seem to necessitate revising some recordkeeping procedures and Form 5500 generating systems, which would be costs that participants would ultimately bear. “Is this really necessary?” is the question we ask.
§ E-filing of information returns could broaden. The IRS would be given authority to set a threshold below the current 250 for mandatory electronic filing of information returns, including the 1099 and 5498 form series. A maximum $5,000 penalty could be assessed for failure to e-file when required. Yes, we live in an increasingly “wired” world, and electronic submission is increasingly more the rule than the exception for trustees and custodians that submit such forms. But for those with limited filing numbers, the option to submit in paper format rather than deal with programming and software issues may still be valuable.
§ Five-year depletion of IRA and employer plan accounts by nonspouse beneficiaries would be required under the president’s proposed budget. There would be certain exceptions, including beneficiaries with a disability, a chronic illness, minor status (reverting to five-year payout upon reaching the age of majority), and those whose age is within 10 years of the decedent. While we recognize that IRAs and employer retirement plans are not primarily for the purpose of inter-generational wealth transfer, it seems that this provision takes away one of the few simple means of providing financially for family members after one’s death. The concept is intended by lawmakers to raise revenues to finance other tax provisions, and should be recognized as such, rather than as some kind of noble tax policy.
It is highly unlikely that President Obama’s proposed budget will find its way into legislation and become law in its current form. Given the split in control of the Senate and House, and the meager evidence of across-the-aisle cooperation, expectations for meaningful legislation in the 113th Congress are low. Nevertheless, all laws begin as proposals, and elements from different sources can become assembled into legislative packages that find their way into law. Therefore, serious scrutiny should be given to any proposals that could have an impact on retirement saving.
