How Can Retirement Provisions in the President’s 2014 Budget Proposal Affect You?

Darlene Finzer | April 25th, 2013

The past few weeks have been full of high visibility news stories ranging from the tragic Boston Marathon bombing to the devastating plant explosion in West, Texas. Amidst these stories and others, there was one important story you may have missed that could affect you and your retirement in a very significant way. President Obama recently unveiled his 2014 budget proposal that resulted in varied opinions over the retirement-related provisions that could greatly impact the retirement industry.

Overview of key retirement-related provisions

  1. The proposal seeks to cap an individual’s retirement account at $3 million. Simply put, this provision would limit an individual’s total retirement account balance (including 401(k)s, IRAs, and other similar tax-preferred accounts) to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement. This would result in the imposed $3 million maximum account balance for a 2013 retiree. According to current statistics, this cap would affect only about 5 percent of individuals; however, the effect cannot simply be measured by the individuals whose ability to contribute is affected. Consideration must also be given to how this change could affect all employees and their employer’s continued support of the 401(k) program.
  2. Small business owners making more than $250,000 per year would be required to pay tax on retirement plan contributions in the year they are made. They’ll also be required to pay these taxes again when these funds are distributed at retirement, thus resulting in double taxation, according to Brian Graff, chief executive officer and executive director, National Association of Professional Advisors and American Society of Pension Professionals & Actuaries.
  3. Small businesses would be required to offer an auto-IRA for employees not benefiting under a company-sponsored retirement plan. This provision would require the employer to automatically withhold contributions from paychecks and directly deposit into a retirement account for the employee unless the employee elects to opt out of such participation. Although tax credits for the administrative costs of setting up the plans would be available, concerns still exist regarding the added administrative burden for such a program and potential fiduciary liability associated with it.
  4. Another provision affecting retirement accounts is the request of eliminating the Internal Revenue Code section 404(k). This code section provides an incentive for employee stock ownership plans (ESOPs) that permits C corporations to deduct the value of dividends paid on ESOP stock passed through to employees in cash. These deductions would be used to pay the ESOP acquisition loan or when an employee reinvests in more company stock in his/her ESOP account balance. This provision could result in a disincentive to create and operate an ESOP, and could hurt people who are trying to be responsible when saving their money.

What Others Are Saying And What You Can Do

The availability of long-term Social Security benefits has been a topic of discussion for several years and has even included advice about not depending on Social Security as your sole source of retirement income. Although Americans are generally not in favor of reducing the cost-of-living adjustment for Social Security benefits, a proposed change in this year’s budget would decrease the cost-of-living adjustment by approximately 0.3 percentage points. This would result in reducing the deficit by $230 billion during the next 10 years. This reduction supports the message to not rely on Social Security as a sole source of retirement income.

Lee Topley, managing director of Unified Trust, captures the dichotomy of the proposed retirement-related provisions: “On one hand, we’re trying to get people to save more for retirement and on the other hand, we’re penalizing those that save well.”

Ohio 401(k) Help

Are you concerned about the impact these provisions may have on your retirement plans? Contact your U.S. congressional representative to express your thoughts. To stay informed about the budget proposal and how it could affect you, contact Rea & Associates. Our Ohio pension TPAs will help you stay up-to-date on current issues.

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