For Individuals,For Plan Sponsors,Custom

President Obama’s Proposed Budget for Fiscal Year 2016

February 25, 2015

President Obama's proposed Fiscal Year 2016 (FY16) Budget was released in February and included provisions that may affect retirement plans. Highlights of the President's proposed budget include:

  • Promote State-established Savings Plans. Many states have been considering legislation to create state-mandated savings programs for private-sector employees whose employers do not voluntarily offer a retirement plan. There is a question whether such programs are subject to ERISA. The President's budget calls for a waiver to any ERISA requirements and for funding to help states adopt "pilot" programs.
  • Facilitate Annuity Portability. Reduces administrative impediments to offering lifetime income options within defined contribution plans, by permitting distribution of a "lifetime income investment" in the event the option is eliminated from the plan.
  • Limit Roth Conversions to Pre-tax Dollars. Eliminate the opportunity for highly-compensated individuals who are ineligible to contribute directly to a Roth IRA to convert a traditional IRA to a Roth IRA. After-tax plan contributions, however, may be converted tax-free to a Roth IRA.
  • Tax Rate and Preferences to Reduce Tax Liability. Limits the tax rate at which upper-income taxpayers can claim itemized deductions and other preferences to reduce tax liability to 28 percent. This limit would apply to pre-tax employee contributions to IRAs and retirement plans (including 457(b) plans), as well as interest on tax-exempt bonds and employer-sponsored health insurance. To avoid double taxation, when deductions or exclusions for contributions are limited, the taxpayer's basis would be adjusted to reflect the tax paid.
  • Retirement Plan Contributions/Accruals. Generally would prohibit additional retirement plan contributions/accruals in years in which an individual's aggregate IRA and employer-based defined contribution plan (e.g., 401(k), 403(b), and 457(b) plans) account balances and defined benefit plan accruals exceed a fixed level. The cap would be based on the actuarial present value at which an individual could purchase an annuity, with an annual payment equal to the current maximum benefit permitted under a defined benefit plan (currently $210,000 per year). For a participant age 62, as an example, the current threshold would be approximately $3.4 million. The cap would be lower for younger participants and, if interest rates rise, the cap could be significantly reduced for all participants.
  • Assets to Non-spouse, Non-dependent Beneficiaries. Requires non-spouse, non-dependent beneficiaries of deceased IRA and retirement plan participants to receive the proceeds of plan assets within five years of the death of the account owner/participant. Under current law, payments can be "stretched" over the beneficiary's life expectancy. The President's budget would allow a non-spouse beneficiary under a tax-qualified retirement plan or inherited IRA to roll over distributions from the arrangement to a non-spousal inherited IRA within 60 days of the distribution.
  • Required Minimum Distributions. Eliminates Required Minimum Distribution (RMD) rules for individuals age 70½ and above whose aggregate balance across tax qualified plans and accounts (including Roth IRAs) is $100,000 or less. However, the budget also proposes that RMD rules apply to Roth accounts during the lifetime of the owner — reversing current law, which requires RMDs for Roth IRAs generally only after the owner's death.

While approval of the President's budget by Congress is unlikely, several of the provisions described above that are of potential importance to the public sector could be incorporated into either tax reform legislation or unrelated spending bills.

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