President Obama’s Proposed Budget for Fiscal Year 2017

March 31, 2016

President Obama's Fiscal Year 2017 (FY17) Budget includes a number of provisions that may affect retirement plans. Several components attempt to address private sector retirement concerns, including increasing coverage for lower-paid workers or those employed by small employers.

While approval of the President's budget by Congress is unlikely, several provisions of potential importance to the public sector could be incorporated into either unrelated spending bills or future tax reform legislation. Highlights of the President's proposed budget include:

  • Retirement Plan Contributions/Accruals. Generally prohibits 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 governmental 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 participants.
  • Tax Rate and Preferences to Reduce Tax Liability. Limits to 28 percent the tax rate at which upper-income taxpayers can claim itemized deductions and other preferences to reduce tax liability. 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.
  • 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. The budget also proposes that RMD rules apply to Roth IRA accounts during the lifetime of the owner - reversing current law, which requires RMDs for Roth IRAs generally only after the owner's death. Additionally, individuals would no longer be permitted to make additional contributions to Roth IRAs after they reach age 70½.
  • 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 participant/owner. Under current law, payments can be "stretched" over the beneficiary's life expectancy. The President's budget would also allow a non-spouse beneficiary under a tax-qualified retirement plan or inherited IRA to roll over distributions indirectly from the arrangement to a non-spousal inherited IRA within 60 days of the distribution. Under current law, a non-spousal rollover must occur through a direct trustee-to-transfer.
  • Facilitate Annuity Portability. Allows retirement plan participants to take a "lifetime income investment" distribution eliminated by the plan without regard to any withdrawal restrictions under the plan.
  • Institute W-2 Reporting for Employer Contributions to Defined Contribution Plans. Additional disclosure to participants designed to 1) provide workers with a better understanding of their overall retirement savings and compensation, and 2) facilitate compliance with the annual contribution limits.
  • Limit Roth Conversions to Pre-tax Dollars. Eliminates the ability for highly compensated individuals who are already ineligible to contribute directly to a Roth IRA to accomplish this indirectly by contributing to a traditional IRA and immediately converting to a Roth IRA.
  • 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. The President's budget calls for funding to help states adopt "pilot" programs.
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