The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Massachusetts is representative of a question about President Obama's proposal to cap a worker’s retirement savings. The advisor asked:
“Can you explain the proposal to cap a worker’s retirement savings at $3.2 million? Where did they come up with that amount?”
Highlights of Discussion
• The proposed cap on a worker’s retirement savings accumulations appeared in both the 2014 and 2015 presidential budget proposals. It didn’t go anywhere last year and likely won’t this year either. If enacted (and that is a big if), it would be effective for contributions and accruals for taxable years beginning after Dec. 31, 2014.
• The “maximum permitted accumulation,” as it is referred to in the proposal, is derived from the maximum annuity benefit that can be paid from a DB pension plan in 2014 (currently an annual benefit of $210,000) payable in the form of a joint and 100% survivor annuity commencing at age 62. This equates to a maximum permitted accumulation for an individual age 62 of approximately $3.2 million.
• As proposed, the cap would be on an individual’s accumulations in all of his or her tax-favored retirement savings vehicles, including IRAs, 401(a) plans (like 401(k) and DB plans), 403(b) plans and governmental 457(b) plans.
• The limitation would be determined as of the end of a calendar year and would apply to contributions or accruals for the following calendar year.
• Anyone who met the cap would be prohibited from making additional contributions or receiving additional accruals (in a DB plan). The taxpayer’s account balance could continue to grow with investment earnings, however.
• The taxpayer would be required to include any excess amounts in taxable income, and would be allowed a grace period to remove it and attributable earnings.
• The Employee Benefit Research Institute (EBRI) ran simulations on how the proposed cap could potentially affect 401(k) participants assuming no DB benefit accruals and no job turnover. EBRI found that more than 1 in 10 current 401(k) participants are likely to hit the proposed cap sometime prior to age 65 (using a discount rate of 4%). (EBRI Issue Brief #389, "Impact of a Retirement Savings Account Cap.")
When the simulation is run with higher discounts rates, the percentage of 401(k) participants likely to be affected increases substantially.
• There are many criticisms of the proposal, not the least of which are its complexity and administrative impossibility.
Conclusion
While it is beneficial to stay up-to-date on the latest thinking in Washington, we believe this proposal is a nonstarter. In fact, it has garnered bipartisan opposition. However, it is a theme that keeps recurring.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.
