President’s Budget Proposal: A Mixed Bag

President Obama’s 2016 budget has been issued, and while parts could expand retirement plan coverage, others are likely to undermine those good intentions. 

No surprise, but the $3 million cap on the value of retirement benefits and the double tax on contributions for those above the 28% tax bracket are back for another year. These proposals do not close any loopholes, nor curb any abuse. There are already limits on contributions and benefits under tax-preferred retirement plans. Moreover, the tax incentives for retirement saving are a deferral, so every dollar on which taxes are deferred today is taxed in the future. 

President Obama’s own pension, based on reasonable actuarial assumptions, is worth more like $5 million dollars, so why is a $3 million cap considered appropriate for a small business owner who has saved on their own for retirement? Worse, under the “double taxation” budget proposal, small business owners and others earning over $250,000 would have to pay tax on contributions in the year the contributions are made — and then pay tax at the full rate when contributions are distributed at retirement. This amounts to a penalty for saving through a 401(k) plan. If a small business owner is going to be penalized or saving in a plan, or not allowed to make additional contributions to that plan, what’s their incentive for continuing to participate in, and ultimately even offer these plans? The real losers would be employees who no longer have a retirement plan at work.

These re-proposals are particularly disappointing because the president otherwise expanded on his proposals to encourage the offering of workplace retirement plans. The proposal to require employers with 10 or more employees and no retirement plan to offer a workplace auto-IRA program is in the budget again this year, and this year with an enhanced tax credit for employers who offer these programs. The budget would also triple the start-up credit for qualified retirement plans, and for the first time offer a credit of $1,500 to small business owners who add automatic enrollment to an existing 401(k) plan. These are all good ideas. Why couple these proposals to expand coverage with proposals that would discourage small business owners from maintaining the 401(k) plans they have now?

The $3 million cap has been in past budgets, and has not found its way into any legislative proposals. Unfortunately the same cannot be said for the double taxation proposal. In the last Congress, then-Chairman of the House Ways & Means Committee Dave Camp’s (R-MI) tax reform plan would have double-taxed both employer contributions and elective deferrals. Although including employer contributions made that proposal an administrative nightmare, the president’s proposal to double-tax elective deferrals could still be tempting to some looking to raise revenue, but who may not fully appreciate the impact of that change on plan formation or employer support for these programs.

The ASPPA/NAPA government affairs team will continue our efforts to see that neither of these wrong-headed proposals become law.

Judy Miller is ASPPA’s Director of Retirement Policy.

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