On March 4, 2014 the Obama Administration released the Fiscal Year 2015 budget proposal. The proposal acts as a framework for Congress to follow in the coming year. Congressional action is needed for any of the provisions to become law. This summary includes some initiatives that could impact employer-sponsored retirement plans and Individual Retirement Arrangements (IRAs).
Automatic IRA and MyRA
In keeping with the Fiscal Year budget proposals from 2011 through 2014, this latest proposal includes a provision for automatic IRAs. Employers who do not currently sponsor a retirement plan would be required to enroll employees in a direct-deposit IRA although employees could elect to opt out if they so choose.
In addition to the automatic IRA, the 2015 proposal also promotes MyRA, that the President introduced in January of this year. Under this proposal, individuals can contribute after-tax dollars into a Roth IRA invested primarily in U.S. government bonds. Employers will have the option to enter a pilot program later this year.
Limiting Deductions and Exclusions
Currently, taxpayers whose income exceeds the 28% tax bracket can claim certain exclusions and deductions that would reduce their taxable income below the 28% tax bracket. This year’s budget proposal limits the tax rate at which high income taxpayers can reduce their tax liability to a maximum of 28%. This limit would apply to tax exclusions for retirement contributions.
Retirement Account Savings Limit
Similar to last year’s proposal, this year’s budget proposal would limit an individual’s total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $200,000 per year in retirement. According to the budget proposal, this equals approximately $3 million per person.
PBGC Authority
The Pension Benefit Guaranty Corporation (PBGC) insures private-sector defined benefit pension plans. In an effort to alleviate current underfunding of the program, the proposed budget would shift the responsibility for setting premium levels for the PBGC from Congress to the Board of Directors of the PBGC.
Non-Spouse Beneficiaries
Currently, a non-spouse beneficiary of an IRA may rollover the IRA to an inherited IRA only by means of a trustee-to-trustee transfer. The budget proposal would expand the rollover options for non-spouse beneficiaries to allow for a distribution from a qualified retirement plan or IRA to an inherited IRA within 60 days of distribution in an indirect rollover. Additionally, the proposal would require non-spouse beneficiaries to take inherited distributions over no more than five years.
Next Step
This budget proposal outlines issues the Administration would like Congress to address in Fiscal Year 2015.