Retirement Plan Changes on the Horizon?
March 01, 2013
The fiscal cliff deal does not end the story…
- Some members of Congress view retirement plans, with their tax-deferral provisions, as tax expenditures (i.e., money the government doesn’t collect due to tax breaks). In that light, retirement plans are the second-highest expenditure category in the tax code.
- Looking at the Roth conversion provision in the ATRA-2012, it appears that Congress is willing to use retirement plans as revenue raisers.
- Congress may try to impose more limits on retirement plans, as it did in the 1986 Tax Reform Act:
- The 401(k) deferral limit was reduced to $7,000 from $30,000 (indexed to inflation); and
- The deduction for IRAs was also limited.
- Among the proposals that have been floated among legislators are:
Simpson Bowles commission: limit combined employee and employer contributions to the lesser of 20% of income or $20,000 from current amount of approximately $51,000—a reduction of nearly 60%.
Senator Harkin (D, Iowa): Universal, Secure and Adaptable (USA) Retirement Funds: Proposed in summer of 2012, these funds are designed to augment current pension and DC plans—both of which would not be changed. Harkin sees his additional solution as sort of a middle ground between pensions and 401(k)s.
- Employers would enroll employees in a pooled fund and process contributions from both employer and employees.
- The fund would have an independent board of trustees for investment selection and management, which would avoid any fiduciary responsibility for employers.
- Pooled assets would allow participants to share risks, but benefits would be portable, as with DC plans.
- The key element is that benefits would be paid as an annuity—an effort to help solve the growing concern of longevity risks in the US.
- 28% cap on the value of retirement plan deductions and exclusions. The Obama administration’s 2014 budget calls for a 28% cap on the value of itemized deductions and other income-tax breaks—including any tax-deductible or pre-tax retirement plan contributions.
- In the hunt for additional future sources of government revenues to temper the growing deficit, the administration is also proposing a $3 million balance limit on an individual’s total tax-preferred savings accounts—contending that these savings vehicles were primarily intended to help middle-class families.
- Federal budget and deficit talks will continue to propose solutions that may have limited prospects for approval—either due to the unpopularity of some measures with voters or the incapacity of the legislative branch to pass any significant new measures.
However, retirement savings plans are on the table, as is most everything else.