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President's Budget Proposal and its Impact on Retirement Plans

The items in the Budget proposal released last month that may impact your plan are similar to the items in budget proposals over the last few years with some minor changes.  The full provisions can be found in the Treasury’s Green Book. PSCA doesn’t expect that action will occur on most of these items. Items of interest to plan sponsors include the following:

1. Automatic IRAs:
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. 

PSCA does not support any mandates to provide employee benefits. While this proposal could potentially broaden access to IRAs, it could have the unintended consequence of plan sponsors getting rid of plans altogether.  

2. Expand 10% penalty exemption for long-term unemployment:
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.  

PSCA doesn’t oppose the concept of this proposal, but is concerned about it causing additional leakage of qualified plan assets, as well as the related administrative issues.

3. Require 401(k) plans to allow long-term, part-time employee participation:
Require 401(k) plans to expand plan eligibility for elective deferrals to employees who have 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.
PSCA appreciates that this proposal could benefit many part-time employees by providing access to retirement plans, however, we are concerned with potential associated administrative burdens, particularly on small employers.

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.

PSCA generally sees merit in this approach, however, it is not clear how many rollover providers would be willing to accept the additional administrative issues associated with administering the annuity. There is a concern that this proposal could dissuade employers from offering lifetime income options. PSCA is also concerned that this proposal could be an incremental step towards turning annuities into a mandated plan feature. 

5. Simplify Minimum Required Distribution (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.

PSCA’s position is that the MRD rules should be repealed, and views this proposal as a step in the right direction. 

6. Allow 60-day rollovers for non-spouse beneficiaries of inherited plan and IRA assets: 
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.

PSCA generally favors this proposal as we believe that expansion of rollover opportunities for all participants further supports the defined contribution system. 

7. Require non-spouse beneficiaries to take inherited distributions over five years: 
Currently, if a participant or IRA owner dies, non-spouse beneficiaries are permitted to receive distribution of the inherited assets over their life expectancy. The budget proposal shortens the period over which non-spouse beneficiaries must receive distribution of inherited assets to no more than five years.  Exceptions apply to beneficiaries who are disabled, chronically ill, minor children, and an individual who is not more than ten years younger than the deceased participant or IRA owner.  The five-year rule applies when a child is no longer a minor.

PSCA recognizes the favorable tax impact that shortening the distribution period in these instances would have on the budget, however, we are concerned about reducing flexibility for retirement plan beneficiaries.

8. New overall limit on 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.

PSCA strongly opposes this proposal to cap the overall savings limit due to the prospective impact this would have on small business owners and their employees.  There would be additional administrative complexity associated with interest rate fluctuation and calculating the total accumulated across multiple vehicles.  PSCA believes that annual additions and compensation limitations are already in existence to address the concern about accumulation of excess retirement assets.

9. 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.

10. Eliminate 404(k) deduction:
Currently, C corporations are allowed a deduction for dividends paid with respect to employer stock held in an ESOP.  The budget proposes to repeal the deduction for publicly traded corporations. 

Elimination of this deduction would severely limit the incentive for the employer to offer company stock as an investment option. 

11. Repeal net unrealized appreciation exclusion: 
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.  

PSCA does not favor this proposal.