NAFCU Services Blog

Apr 18, 2013 by Dennis Zuehlke

Obama Budget Proposes Cap on Retirement Plan Balances

Originally posted on

Guest post written by Dennis Zuehlke, Compliance Manager, Ascensus.

Ascensus is the NAFCU Services Preferred Partner for IRA, Retirement Plan, and Health Savings Account (HSA) Solutions Software, Training, Documents and Consulting.

The Obama Administration has proposed a cap of $3 million on IRAs and retirement savings plans in order to raise $9 billion of additional revenue over the next 10 years. This is the first time that the Obama Administration has proposed a cap on the total amount of assets that can be accumulated in IRAs and retirement savings plans held by individuals. It comes on the heels of the Administration’s proposals in last year’s budget to reduce the tax incentives for making retirement plan and IRA contributions.

The Administration released details of the proposal in the Fiscal Year 2014 Revenue Proposals. Under this new proposal, contributions to tax-advantaged retirement savings plans (such as IRAs, 401(a) plans, 403(b) plans, and funded section 457(b) governmental plans) would be prohibited for individuals who have accumulated assets past a certain threshold. That threshold is the amount necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan (currently $205,000), which, for an individual age 62 in 2013, would be approximately $3.4 million.

Under the proposal, if an individual reached the maximum permitted accumulation, no further contributions or accruals would be permitted, but the individual’s account balance could continue to grow with investment earnings and gains.

Although the cap would impact a small number of plan participants and IRA owners, there is concern within the retirement industry that it could discourage employers from offering retirement plans and restrict the retirement savings ability of self-employed professionals who have higher contribution limits and are more likely to reach the cap.

The Fiscal Year 2014 Revenue Proposals also include a number of provisions that the Obama Administration included in previous budget packages.

One of those provisions would limit the tax value of specified deductions or exclusions from adjusted gross income (AGI) and all itemized deductions. Under current law, certain types of income are excluded permanently or deferred temporarily from income subject to tax, including amounts paid by employees and employers for defined contribution retirement plans, such as 401(k) and 403(b) plans.

The Administration’s proposal would reduce the tax value of the exclusion for employee contributions to a maximum of 28 percent for defined contribution retirement plans and IRAs, instead of allowing taxpayers to exclude the contributions from the full 33 percent, 35 percent, or 39.6 percent that they would otherwise owe. Taxpayers in the 28 percent and lower brackets would be unaffected. This same provision also would limit the tax value of contributions made by these higher-income taxpayers to health savings accounts and Archer medical savings accounts.

Another proposal would require nonspouse beneficiaries of retirement plans and IRAs to take distributions over a period of no more than five years. Under current law, depending on the original IRA owner’s date of death and whether there is a designated beneficiary under the plan, a nonspouse beneficiary may be able to take payments over his or her own life expectancy. As proposed, most nonspouse beneficiaries would be required to take distributions over a period of no more than five years, with exceptions for certain eligible beneficiaries.

Eligible beneficiaries include any beneficiary who, as of the IRA owner’s date of death, is disabled, chronically ill, not more than 10 years younger than the plan participant or IRA owner, or a minor child. Distributions for these beneficiaries, with the exception of a minor child, would be allowed over the life expectancy of the beneficiary. In the case of a minor child, the account would need to be fully distributed no later than five years after the child reaches the age of majority.
The move to cap retirement plan balances and trim retirement tax incentives reflects the Obama Administration’s belief that retirement savings tax incentives should be more focused on lower- and middle-class taxpayers and are designed primarily to provide retirement security for participants and their spouses, not to transfer wealth to their beneficiaries. It also sends a signal that the Obama Administration may be widening its net in search of revenue; since prior to last year’s budget proposal, the Administration’s three previous budget proposals left retirement tax incentives untouched.

The President’s budget submission traditionally starts the congressional budgeting process, but the White House announced earlier this year that it would not meet the February 4 deadline for submitting its budget. In the interim, both the House and Senate moved forward and have passed their own budget proposals, which are markedly different from each other and the President’s proposal. Given the political realities, it is unlikely that any of the three budget proposals will be accepted as legislative blueprints in their current form. If agreement is reached on a broad budget proposal, it is virtually certain to include concessions from both parties.

Regardless of what happens with the various budget proposals, there is growing concern in the industry that as the dollars in tax-advantaged savings plans have grown, along with the cost to the Treasury of retirement tax incentives, Congress will look to reduce retirement savings incentives as a way to balance the budget. If that were to happen, it could have a chilling effect on individuals saving for retirement, as well as on credit union IRA programs. Stay tuned.

Ascensus is the NAFCU Services Preferred Partner for IRA, Retirement Plan, and Health Savings Account (HSA) Solutions Software, Training, Documents and  Consulting.

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