Savings Cap Could Impact More Than Previously Believed

August 27, 2013 ( – The presidential proposal to cap retirement savings could affect even more workers than previously thought, according to a new study from Employee Benefit Research Institute (EBRI).

The study found that the cap, part of the larger 2014 budget proposal by President Barack Obama, could potentially impact a significant number of workers should interest rates return to their historically higher levels. The study follows up analyses done by EBRI earlier this year (see “Savings Cap Could Affect Up to 5% of Participants”).

Using its Retirement Security Projection Model, EBRI found that for 401(k) participants (assuming no defined benefit accruals and no job turnover), more than one in 10 current participants will likely hit the proposed cap sometime prior to age 65, even at the current and historically low discount rate of 4%. And when the simulation is rerun with higher discount rate assumptions that are closer to historical averages, the percentage of participants likely to be affected by the proposed limits increases substantially.

“While relatively few 401(k) participants would be affected by this at first, the impact would likely spread over time, perhaps substantially, depending on interest rates and whether individuals also participate in a defined benefit retirement plan,” said Jack VanDerhei, research director at EBRI and author of the study.

The proposed cap on tax-deferred retirement savings would limit the amounts accumulated in specified retirement accounts to that necessary to provide the maximum annuity permitted for a tax-qualified defined benefit (DB) plan under current law.

The maximum annuity permitted for a tax-qualified DB plan is currently an annual benefit of $205,000 payable in the form of a joint and 100% survivor benefit commencing at age 62. This would translate to a maximum permitted accumulation for an individual age 62 of approximately $3.4 million at the interest rates prevailing when the proposal was released in April 2013, according to the study.

To reduce the federal deficit, the 2014 budget proposal would potentially limit the ability to make additional contributions (at least temporarily) to a wide range of tax-advantaged retirement plan vehicles, including:

  • Individual retirement accounts (IRAs);
  • Section 401(a) plans (tax-advantaged retirement plans, including 401(k)s), and Section 403(b) tax-sheltered annuity plans; and
  • Funded Section 457(b) arrangements maintained by governmental entities.

If enacted, the proposal would become effective with respect to contributions and accruals for taxable years beginning on or after January 1, 2014.

The recent EBRI study also considered the potential impact on workers with an assumed DB providing 2%, three-year, final-average pay benefits, with a subsidized early retirement at age 62. It found that nearly a third are projected to be affected by the proposed limit, at an 8% discount rate.

The study also performed an analysis for small plans (those with less than 100 participants) to assess the impact of eventual plan terminations if and when the owners and/or key decisionmakers of the companies reach the cap threshold. Depending on plan size, this may involve as few as 18% of companies (at a 4% discount rate) or as many as 75% of companies (at an 8% discount rate).

More information on the recent study can be found in the August 2013 issue of the EBRI Issue Brief, which can be accessed here.