It’s difficult to paint a picture that adequately portrays the retirement readiness of the American people. How prepared the average person is for this phase of their life greatly depends on which report you are reading today. As a whole, however, credible sources indicate that as a population we are simply not prepared to take on the financial responsibility of supporting ourselves later in life, which is a problem that has received a lot of attention from our nation’s leaders.
Last year marked the introduction of myRA, a retirement account program that encourages individuals without access to an employer-sponsored retirement plan to save for their retirement. Developed by the United States Department of the Treasury, myRA seeks to offer a solution to those who “face barriers to saving for retirement.” But that’s not the only chatter heard on Capitol Hill these days, with regard to the retirement savings habits of Americans. Members of Congress have proposed other solutions that they hope will make the retirement picture a little bit brighter.
2016 Budget Proposal Addresses Retirement Savings
The U.S. government’s 2016 Budget Proposal includes provisions that target the promotion of retirement goals.
“Millions of working Americans lack access to a retirement savings plan at work. Fewer than 10 percent of those without plans at work save in a retirement account on their own. In 2015, retirement security will be one of the key topics of the White House Conference on Aging. The Budget would make it easy and automatic for workers to save for retirement through their employer – giving 30 million more workers access to a workplace savings opportunity. The Budget also ensures that long-term part-time employees can participate in their employers’ retirement plans and provides tax incentives to offset administrative expenses for small businesses that adopt retirement plans.”
What is important to note is that, in addition to retirement security, the Proposal focuses on generating government revenue, which would (in part) go toward the creation of new tax benefit programs. The impact, according to the Whitehouse, would result in savings for as many as 30 million American taxpayers.
Today, nearly 78 million working Americans are unable to save for retirement simply because they are not eligible to enroll or because their employer doesn’t offer the opportunity to save for retirement. This Proposal introduces a solution for those who would like to begin saving for their golden years.
For example, one possible scenario outlined within the budget calls for all part time workers (those who have worked for their current employer at least 3 consecutive years and who have worked at least 500 hours during each year of their employment), who are not currently contributing to a retirement plan, to be allowed to contribute to the company’s existing retirement plan without requiring the plan sponsor to add matching contributions for such individuals.
Another is for those who do not have access to an employer-based retirement plan, however, would be automatically enrolled in a separate IRA program, which would be funded by payroll withholdings. Of course, the taxpayer would have the option to opt out of the program.
What’s In It for the Employer?
The retirement savings provision outlined in the 2016 Budget Proposal not only provides individual Americans with an opportunity to save, it seeks to provide financial incentives to eligible companies that establish their own 401(k), auto-IRA or that offer another similar retirement plan to their employees by expanding the small business tax credit.
This provision would also include an additional credit for small businesses that currently offer retirement plans to include an automatic enrollment feature within their plans.
Employees who are still unable to save for retirement will have a third option available. The Budget Proposal calls for the allocation of $6.5 million to the Department of Labor, which would allow a limited number of states to implement state-based auto enroll IRAs or 401(K)-type programs.
Mind the Cap
President Barack Obama’s 2016 Budget Proposal, while ambitious in its initiative to strengthen Social Security and incentivize retirement savings programs for Americans, also includes a provision that had been proposed (and rejected) before. The additional provision seeks to cap (prohibit additional contributions) on IRAs and other tax-preferred retirement plans once they reach a balance of $3.4 million.
According to the president, this step ensures that the individual secures sufficient annual income in retirement while preventing the “overuse” of existing tax advantages by those who are able to contribute additional funds, creating higher balance accounts. The cap would also help the government generate additional revenue because the funds that exceed the $3.4 million cap would now be taxable under this provision.
As always, when it comes to the future of Social Security and the overall retirement readiness of the American people a lot can change in a short amount of time. The 2016 Budget Proposal still has a long way to go before any of the provisions outlined within become reality. It’s important for you to be aware of these provisions and how they could change our current retirement plan landscape.
In the meantime, don’t just wait for changes to happen. Take steps today that will maintain the flexibility of your existing benefit plan while optimizing your company’s current and future ROI. Email the Benefit Plan Audit team at Rea & Associates to learn more.
By Darlene Finzer, CPA, QKA, CSA (New Philadelphia office)