President’s 2016 Budget Proposal

The president released his fiscal year 2016 budget proposal during first quarter. Unlike other retirement plan-related proposals introduced this year, the president’s budget proposal appears to combine retirement savings provisions with tax reform initiatives that would reduce the revenue impact of retirement savings.

Retirement savings tax incentives are the second biggest tax expenditure (behind mortgage interest deductions), which make them a target for tax reform initiatives that focus on raising tax revenue. The president’s proposal includes the following among its retirement plan-related provisions:

  • Capping retirement savings accumulations to approximately $3.4 million (for 2015)
  • Capping the tax deductions for retirement savings at the 28% tax bracket
  • Requiring nonspouse beneficiaries to distribute inherited assets within 5 years
  • Restricting Roth conversions to pre-tax amounts only
  • Eliminating net unrealized appreciation (NUA) tax treatment for employer stock
  • Requiring certain employers to establish an automatic enrollment IRA plan

Many of the president’s retirement-savings related budget proposals are repeats from prior years and are unlikely to move forward, unless bipartisan support can be achieved on certain tax reform issues.

Other Retirement Plan-Related Proposals

To promote saving and investing within the current retirement plan system, Senator Orrin Hatch, Chairman of the Senate Finance Committee, intends to reintroduce the Secure Annuities for Employees (or SAFE) Retirement Act. The SAFE Act, as introduced in 2013, included incentives to encourage small business employers to establish retirement plans. This includes creating the deferral-only “Starter 401(k)
plan” and streamlining aspects of plan administration. Other provisions of the SAFE Act would encourage the use of lifetime annuities in 401(k) plans and expand access to multiple employer plans (MEPs) for unrelated small businesses to pool their resources and ease administrative burdens.

Two bipartisan bills were introduced early this quarter, one in the House and one in the Senate, that include provisions similar to some of those contained in Senator Hatch’s SAFE Act. Both bills were named the Retirement Security Act of 2015 and would also encourage small employers to offer retirement plans and offer incentives to employees to save more.

Yet another bill aimed at encouraging small business owners to sponsor retirement plans was introduced by Representatives Ron Kind (D-Wisc.) and Dave Reichert (R-Wash.): the Small Businesses Add Value for Employees (or SAVE) Act of 2014. This bill contains provisions similar to the other bills, including modifying the safe harbor 401(k) plan rules and modifying the rules for automatic enrollment plans. Passage of any one bill in its entirety is unlikely at this point, but some of the provisions common among multiple bills appear to have bipartisan support and could be included in other legislation.

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This information is provided as a reference tool for your convenience and may not represent a complete list of all events that apply to your plan.

For Plan Sponsor Use Only – Not for Use with Participants or the General Public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.

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