2008 Presidential Budget Renews Administration Efforts On Savings Plans

February 22, 2007

The Bush Administration's Fiscal 2008 proposed budget once again includes proposals to consolidate existing 457, 401(k), and 403(b) retirement savings plans, and several types of IRAs. In addition, health savings accounts (HSAs) would replace Flexible Savings Accounts and other tax-advantaged health care cost programs - all in the name of simplification.

The Administration has previously introduced much of what the budget proposes now and will likely face strong political and industry opposition.

ICMA-RC has long held that existing retirement savings plans are effective because they respond to the specific needs of public and private sector participants. ICMA-RC appreciates efforts to simplify IRA programs, particularly as a way to encourage more retirement saving among individuals that do not have access to an employer-provided plan.

Under the budget proposal, 401(k), SIMPLE 401(k), 403(b), and 457 plans, as well as SIMPLE IRAs and salary reduction simplified employee pension plans (SARSEPS) would be consolidated into a 401(k)-like single employee retirement savings account (ERSA).

Traditional IRAs and Roth IRAs would be consolidated into retirement savings accounts (RSA) that would strongly resemble a Roth IRA. Individuals could make annual non-deductible contributions of up to $5,000. RSAs would be solely for retirement savings and other withdrawals would be subject to taxes and penalties.

In describing the existing regulations and laws, the government said in a publication released with the budget: "This complexity imposes substantial costs on employers, participants, and the government, and likely has inhibited the adoption of retirement plans by employers, especially small employers."

The Administration's budget would also replace existing health and medical savings accounts, including Flexible Spending Accounts, with a single Health Savings Account (HSA). The Administration argues the changes would promote the use of higher-deductible health plans as a way to heighten health cost consciousness and reduce health care costs as a result.

Also in the document is a proposal to create Lifetime Savings Accounts (LSA) where individuals could make annual nondeductible after-tax contributions of up to $2,000 annually. The money set aside in an LSA could easily be tapped for almost any purpose, a provision critics point out might lead to lower savings because of the ease of withdrawing the funds.

Budget hearings on the various proposals are anticipated and it is possible that these proposals will be mentioned during that process. However, we do not anticipate action on them at this time.

• For additional background see ICMA-RC's summary of retirement savings plan proposals in the 2007 proposed budget.