A few weeks ago, the President released his proposed budget for the fiscal year 2017. As usual, it is dense. However, the President has suggested some changes to employee benefits that are worth noting. While they are unlikely to get too much traction in an election year, it is useful to keep them in mind as various bills wind their way through Congress to see what the President might support.
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Auto-IRAs. Stop us if you’ve heard this one before. The proposal would require every employer with more than 10 employees that does not offer a retirement plan to automatically enroll workers in an IRA. No employer contribution would be required and, of course, individuals could choose not to contribute. (In case you’ve forgotten, we’ve seen this before.)
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Tax Credits for Retirement Plans. Employers with 100 or fewer employees who “offer” an auto-IRA (note the euphemistic phrasing in light of the first proposal) would be eligible for a tax credit up to $4,500. The existing startup credit for new retirement plans would also be tripled. Small employers who have a plan, but add automatic enrollment would also be eligible for a $1,500 tax credit.
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Change in Eligibility for Part-Timers. The budget would require part-time workers who work 500 hours per year for three consecutive years to be made eligible for a retirement plan.
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Spending Money to Help Save Money. The President proposes to set aside $6.5 million to encourage State-based retirement plans for private sector workers.
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Opening Up MEPs. To help level the playing field with the State-run plans, the budget proposes to remove the requirement that employers have a common bond to participate in a multiple employer plan (MEP). This is a proposal that has already been floated by Sen. Orrin Hatch, so there’s some possibility that, even in an election year, this might get passed (probably, if not mostly, because it would be hard for anyone to have a vote for open MEPs used against them on the campaign trail given that so few outside the retirement space even know what they are).
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More Leakage For Long-Term Unemployed. The budget also proposes to allow long-term unemployed individuals to withdraw up to $50,000 per year for two years from tax-favored accounts. This proposal, if implemented, would be interesting to study empirically. Obviously, it would lead to more leakage from retirement plans, but would people be more apt to contribute knowing that they could withdraw if they really needed to do so?
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Double-tax of Retirement Benefits? In what appears to be a repeat of a prior proposal, page 50 of the budget summary states that the value of “Other Tax Preferences” (not specified) would be limited to 28 percent. This would seem to describe the President’s proposal from prior years that to the tax benefit of retirement plan contributions (among other items). However, such a proposal is, in our view, counter-intuitive given the other proposals to expand retirement access.
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Cadillac Tax Would Get a Tune-Up. The ACA tax on high-cost coverage would change the thresholds that determine when the tax applies. Currently, there is one threshold for self-only coverage and another for coverage other than self-only coverage. The budget would propose to change the thresholds to the higher of those amounts or the average premium for a gold plan in the ACA Marketplace in each state. This is designed to help address geographic variations in the cost of coverage. There is also a mention in the summary of making it easier for employers with flexible spending arrangements to calculate the tax, but it is not clear what form that would take.
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Miscellaneous. In the budget tables, there are also a few benefits items, such as:
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Expanding and simplifying the small employer tax credit for employer contributions to health insurance (page 148).
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Simplifying the required minimum distribution rules (page 152).
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Taxing carried interests / profits interests as ordinary income (page 153).
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Requiring non-spousal beneficiaries of deceased IRA owners and retirement plan participants to take inherited distributions over no more than five years (page 153).
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Capping the total accrual of tax-favored retirement benefits (which seems like another repeat of prior proposals – page 153).
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Limiting Roth conversions to pre-tax dollars (page 153).
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Eliminating the deduction for dividends on stock in ESOPs of publicly-traded companies (page 153).
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Repealing the exclusion of net unrealized appreciation for certain distributions of employer securities from qualified retirement plans (page 153).
A summary of these changes from the Administration is available here (along with a few other items). More on the overall budget is available here.
