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Weekly News – Week of April 16, 2013

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President Obama’s Budget Outline

On April 10, 2013, President Obama released his budget outline for fiscal year 2014. The budget contains two key provisions that would seriously impact the tax incentives for retirement savings.

28% cap on individual deductions and exclusions

The first proposal, which was also in the 2013 budget proposal, would place a 28% cap on individual deductions and exclusions, including elective deferrals for retirement savings. This means if a participant has a marginal tax rate of over 28%, that person would essentially be paying a surtax on employee contributions to a qualified retirement plan equal to the marginal rate less 28%. This proposal, therefore, taxes contributions to retirement plans twice because ordinary income tax would still be paid on future distributions from the retirement savings account.

$3 million cap on value of benefits

The second proposal would cap the value of an individual’s retirement savings across all qualified plans and IRAs at the amount required to purchase an annuity equal to the maximum defined benefit payable at age 62 under the 100% joint and survivor form of payment (apparently based on IRC §417(e) rates). For 2013 the defined benefit limit is $205,000 per year. This means the cap would be about $3.4 million in 2014.

If the annuity payable at age 62 that could be purchased by an individual’s account balances at the end of the previous tax year, plus any benefit accrued to date in a defined benefit plan, exceeds the dollar limit ($205,000), no additional contributions or benefits could be accrued in the taxfavored accounts for that following year. Accounts could continue to grow with investment earnings, but if any additional contributions or benefit accruals occur during the year, the taxpayer would have to include these excess accumulations in income and would have a grace period to withdraw the excess contribution or accrual. Failure to do so would result in inclusion of the excess amounts in income when the amounts are withdrawn in the future, even if the distribution is from a Roth account.

Although the stated intent of the proposals is to target tax preferences primarily used by wealthy Americans, the proposals will impact taxpayers across the income spectrum by giving business owners and other decision makers less incentive to maintain retirement plans that benefit all workers. We at ASPPA believe that we need to do more to encourage business owners to sponsor retirement plans so that workers can save and benefit from the nondiscrimination rules, not penalize employers for doing so. ASPPA is vigorously opposing these cap proposals.

Other proposals affecting qualified plans

The budget also included a number of other proposals that would affect retirement savings:

404(k) ESOP dividend deduction for large C corporations

The Administration proposes to repeal the 404(k dividend deduction for employer stock held in an annual receipts of more than $5 million.

Mandatory “Auto IRA” The Administration proposal would require employers that do not currently offer a retirement plan to their employees (with limited exceptions) to provide automatic enrollment in an IRA through payroll deduction. Employees would, of course, have the right to opt out. Tax credits for small businesses would be expanded in order for this requirement to be implemented.

Stretch” IRA eliminated

The Administration proposal would require nonspouse beneficiaries of IRA owners and retirement plan participants to take inherited distributions over no more than five years (with limited exceptions). This would eliminate a primary benefit attributed to Roth IRAs.

Form 5500 information expansion

The Administration proposal would give the IRS the same authority that the DOL currently has with respect to information required to be filed electronically on the Form 5500. IRS will be able to add items such as participation and coverage statistics.

Simplification of minimum required distribution requirements

The Administration proposal would eliminate minimum required distributions for retirement plan and IRA balances of $75,000 or less.

Inherited plan rollovers

The Administration proposal would expand the 60‐day rollover rule to all inherited plan and individual retirement accounts; currently this is not available to non‐spouse beneficiaries.

PBGC premiums

Beginning in 2015, the Administration proposal would give the PBGC’s Board the authority to adjust the premiums companies pay and would direct the PBGC to account for the risk plans pose to the PBGC. (This budget proposal anticipates an addition $25 billion in premiums would be raised.) The President’s proposed budget is just that—a proposal with no force of law. If there is a budget deal, we can expect at least some of these items will be considered. Therefore, we are voicing our strong concerns about these proposals with key decisionmakers now so that they fully understand the implications of their actions.

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