Budget Proposals for Retirement Savings—A Deterrent or Not?

The proposed budget would place a cap on retirement savings, prohibiting employees from saving more than $3 million in individual retirement accounts (IRAs) and other retirement accounts. Analyses from the Employee Benefit Research Institute suggest that up to 5% of retirement plan participants could be affected by this cap (see “Savings Caps Could Affect 5% of Participants”).

The budget would also place a cap on how much could be deferred on a pre-tax basis, taxing participants’ savings before they are put into retirement plans, but not eliminating the taxation of assets when they are withdrawn from retirement plans.

Small Business Owners Will Be Limited 

“We were very concerned when last year’s budget included a double tax on contributions to 401(k) plans. Small business owners earning over $250,000 would have to pay tax on contributions in the year the contributions are made then pay tax at the full rate when contributions are distributed at retirement,” said Brian H. Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries (ASPPA). “We were hoping this misguided proposal would be eliminated in this year’s budget, but instead the Administration has kept the double tax proposal, and added another penalty for retirement savings.”

“Now, if a small business owner has saved $3 million in his or her 401(k) account, they won’t be allowed to save any more. Without any further incentive to keep the plan, many small business owners will now either shut down the plan or reduce contributions for workers. This means that small business employees will now lose out not only on the opportunity to save at work, but also on contributions the owner would have made on the employee’s behalf to pass nondiscrimination rules,” said Graff.

Participants Don’t Need Disincentive from Saving  

Scott Macey, president and CEO of the ERISA Industry Committee (ERIC), says the budget proposal does not consider unintended consequences.

“Individuals and families already are struggling to save enough for retirement, and they do not need another disincentive from saving. Moreover, the burden of calculating whether a participant exceeds the $3 million cap would only add an additional layer of complexity in retirement planning and would unfairly burden participants, as well as plan sponsors.

“Policymakers should keep in mind that most monies saved in retirement accounts are tax deferrals, and will eventually be subject to taxation. There are also complex rules which limit the amount that highly compensated workers can contribute to retirement plans, as well as detailed rules that assure comparable treatment of all participants in plans. This proposal appears to be a way to pay for other Administration spending priorities, with no real sound policy justification.

“ERIC urges the President to withdraw this ill-advised proposal and concentrate more on incentivizing individuals and families to save more for retirement, rather than penalizing those who have successfully planned for their retirement.”

Kenneth E. Bentsen, Jr., acting president and CEO of the Securities Industry and Financial Markets Association (SIFMA), says savings have a positive effect on capital markets as well as the quality of life for retirees. We need to be emphasizing the importance of saving and saving early, not changing the tax rules mid-stream."

Not a Big Deterrent  

Not all of the reactions over the proposed budget, however, have been negative.

In speaking with PLANSPONSOR, Lee Topley, managing director of Unified Trust, a Lexington, Kentucky-based wealth management and retirement plan consulting firm, believes that the $3 million cap will “really only impact a small percentage of participants, targeting the higher income level.”

When asked if he thought the budget provisions would discourage someone from joining a company or participating in a retirement plan, Topley said, “No, I don’t think so. And I don’t see someone switching jobs because of this, since these restrictions would be everywhere.”

As to how plan sponsors would be affected, Topley said, “It may create a burden on the plan sponsor in that this is an additional thing to monitor. There may be questions of how this new data is tracked and who will be responsible for tracking it. I don’t see plan sponsors changing their contribution rates because of this. Overall, these provisions will not be a big deterrent to an employer starting or continuing a retirement plan.”

Topley pointed to a dichotomy in the situation. “On the one hand, we’re trying to get people to save more for retirement,” he mused, “and on the other hand, we’re penalizing those that save well.”