February 11, 2016

Obama Administration’s Fiscal Year 2017 Federal Budget Proposals Affecting Retirement Plans and Savings

The federal Budget for Fiscal Year 2017 (Budget), which was published on February 9, 2016, includes several proposals that would affect retirement plans and savings.

Defined Contribution Open MEPs

A multiple-employer plan (MEP) is a plan maintained under the “single-employer” rules in which two or more unrelated employers participate. Under current law, the unrelated employers must have a “common bond” in order to qualify as a MEP. The Budget would eliminate the common bond requirement for defined contribution MEPs, and replace it with various safeguards. There have been bi-partisan proposals for these open MEPs over the last several years, but this is the first time that the Obama Administration has supported the concept. The DOL would have authority to issue guidance, including guidance to allow multiple employer plans to spin off the benefits of an employer who violates the applicable laws (thereby addressing the nondiscrimination testing “one-bad-apple” problem).

Pilot Program Funding for State Retirement Savings Initiatives for Private-Sector Employees

In November 2015, the Department of Labor (DOL) issued guidance aimed at state-sponsored auto-IRAs and retirement marketplaces for private-sector employees who do not have access to employment-related retirement savings. This guidance specified ways for states to enact laws consistent with the preemption provisions of the Employee Retirement Income Security Act (ERISA) and allowed for state-sponsored MEPs. In addition, the DOL announced that it would be requesting $6.5 million to assist in the creation of pilot programs for state-based 401(k)-type arrangements and automatic enrollment IRAs. The Budget would provide that $6.5 million.

Mandatory Automatic-Enrollment IRAs

As it has in past years, the Budget would require most employers (those in existence for at least two years and that have more than 10 employees) that do not currently offer a retirement plan to provide an automatic enrollment IRA program. Under the proposal, no employer contributions to the IRAs would be required and employees could opt out of the program. Employers could opt-out only by providing a different type of retirement savings plan.

PBGC Premiums

For the first time in many years, the Budget does not include a proposal to increase single-employer Pension Benefit Guaranty Corporation (PBGC) premiums. The Budget would, however, authorize PBGC to raise $15 billion for the multiemployer program over the next 10 years (the budget window) and assumes this would be done by developing a multiemployer plan variable-rate premium applicable to underfunded plans and an “exit” premium applicable to employers that withdraw from multiemployer plans. The Budget allows PBGC to establish both the basis and the rate for the new premiums. Congress has regularly rejected past suggestions that PBGC be given discretion to set and allocate premiums for the single-employer variable-rate premium.

Other Significant Items

The Budget includes a number of other significant items related to retirement plans and savings:

  • The Budget would provide $100 million to fund pilot programs for states and non-profit organizations “to design, implement, and evaluate new approaches to expand retirement and other employer-provided benefit coverage.”
  • The Budget would limit individual tax deductions to 28 percent. This limit would reduce the value of pre-tax contributions to 401(k) plans and IRAs for some workers.
  • The Budget would include a special tax credit of up to $4,500 for a small employer (an employer with 100 or fewer employees) that offers an auto-IRA. In addition, the Budget would triple the existing start-up credit for small employers and extend it an additional year, so that small employers that offer a new retirement plan would receive a tax credit of $6,000. Finally, the Budget would provide small employers  that already offer a plan and add an auto-enrollment feature an additional tax credit of $1,500.
  • Currently, any withdrawals a participant makes from a plan or IRA prior to age 59½ is subject to a 10 percent penalty for early withdrawal unless a statutory exemption applies. The Budget would add a new exemption that allows long-term unemployed individuals to withdraw up to $50,000 per year for two years from any retirement account without early withdrawal penalties.

Outlook

While the Republican-controlled Congress is not expected to accept these Budget proposals, several of them could show up in amended form as part of bi-partisan legislation later this year or in future years. This is most likely for the open MEP proposal.

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