Impact of 2016 Budget Proposal on Retirement Plans

President Obama released his fiscal year 2016 federal budget and as expected, the it includes many retirement-related proposals.  Below is a summary of the budget proposals that may impact your plan, if they are passed as presented in the budget.

Click here to view the full “Green Book,” which provides a more detailed explanation for all of the budget proposals.
 

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Tax Reform for Families and Individuals  

1. Provide for Automatic Enrollment in IRAs, Including a Small Employer Tax Credit, Increase the Tax Credit for Small Employer Plan Start-Up Costs, and Provide an Additional Tax Credit for Small Employer Plans Newly Offering Auto-Enrollment

• Employers would be required to offer automatic IRAs if (1) they have been in business for at least two years, (2) have more than 10 employees, (3) and do not already sponsor a retirement plan. If the employer sponsors a plan but excludes from eligibility a portion of its workforce (e.g., all employees of a subsidiary or division), the employer would be required to offer automatic IRAs to those excluded employees.  
   
• Small employers offering automatic IRAs would be entitled to the following tax credits:? Up to $1,000 per year for related expenses for three years.? $25 per enrolled employee up to $250 per year for six years.? The credit for “start-up costs” would be tripled from the current maximum of $500 per year for three years to a maximum of $1,500 per year for three years and extended to four years.? $500 per year for up to three years for new plans that include auto-enrollment or if they add auto-enrollment as a feature to an existing plan.

2. Expand Penalty-Free Withdrawals for Long-Term Unemployed

• Expand the 10 percent early withdrawal penalty exception to cover more distributions to long-term unemployed individuals from an IRA, 401(k) or other tax-qualified defined contribution plans. An individual would be eligible for this expanded exception if (1) the individual has been unemployed for more than 26 weeks by reason of a separation from employment and has received unemployment compensation for that period, (2) the distribution is made during the tax year in which the unemployment compensation is paid or in the succeeding tax year, and (3) the aggregate amount of such distributions does not exceed certain annual limits.  

3. Require Retirement Plans to Allow Long-Term, Part-Time Workers to Participate

• Require 401(k) plans to expand plan eligibility for elective deferrals to employees that worked at least 500 hours per year with the employer for at least three consecutive years.
   
• The proposal would not require expanded eligibility to receive employer contributions, including matching contributions.

4. Facilitate Annuity Portability

• The proposal would permit a plan to allow participants to take a distribution of a lifetime income investment through a direct rollover to an IRA or other retirement plan if the annuity investment is no longer authorized to be held under the plan, without regard to whether another event permitting a distribution has occurred. The distribution would not be subject to the 10 percent early withdrawal penalty.

5. Simplify Minimum Required Distributions (MRD) Rules

• The proposal would exempt an individual from the MRD requirements if the aggregate value of the individual’s IRA and tax-favored retirement plan accumulations does not exceed $100,000 as of a certain measurement date.

6. Allow all Inherited Plan and IRA Balances to be Rolled over Within 60 Days

• The proposal would expand the options that are available to a surviving non-spouse beneficiary under a tax-favored retirement plan or IRA for moving inherited plan or IRA assets to a non-spousal inherited IRA by allowing 60-day rollovers of such assets.

Loophole Closures 

1. Require Non-Spouse Beneficiaries of Deceased IRA Owners and Retirement Plan Participants to Take Inherited Distributions Over No More than Five Years

• Non-spouse beneficiaries of retirement plans and IRAs would be required to take distributions over no more than five years. Certain exceptions would be provided for eligible beneficiaries. 

2. Limit the Total Accrual of Tax-Favored Retirement Benefits

• Taxpayers who have accumulated benefits in their account(s) in excess of the amount necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan under current law (currently an annual benefit of $210,000) would be prohibited from making additional contributions or receiving additional accruals.

3. Limit Roth Conversions to Pre-tax Dollars

• The proposal would permit amounts held in a traditional IRA to be converted to a Roth IRA (or rolled over from a traditional IRA to a Roth IRA) only to the extent a distribution of those amounts would be includable in income if they were not rolled over. Thus, after-tax amounts held in a traditional IRA could not be converted to Roth amounts. A similar rule would apply to eligible retirement plans.

4. Eliminate Deduction for Dividends on Stock of Publicly-Traded Corporations Held in Employee Stock Ownership Plans

• The proposal would repeal the deduction for dividends paid with respect to employer stock held by an ESOP that is sponsored by a publicly traded company.

5. Repeal Exclusion of Net Unrealized Appreciation in Employer Securities

• The proposal would repeal the exclusion of net unrealized appreciation in employer stock in the year of a distribution for participants in tax-qualified retirement plans who have not yet attained age 50 as of 12/31/15. Participants who have attained age 50 on or before 12/31/15 would not be affected.