In mid-April, President Barack Obama unveiled his budget for the upcoming year. Although the budget is essentially a “wish-list” for the President and most of its proposals and recommendations are likely to fall by the wayside at some point, the number of retirement related items in this year’s budget is causing many clients to take notice. Below we discuss the six proposals included in this year’s budget that directly relate to retirement accounts so that you can answer the questions that clients are, or soon will be, asking.
1) Mandatory Auto-Enrollment IRAs for Certain Small Businesses
The Proposal – Employers in business for at least two years that have more than 10 employees would be required to offer auto-enrollment IRAs to their employees. Contributions to employees’ IRAs would be made on a payroll-deduction basis. Employees would be able to elect how much of their salary they wish to contribute to their IRA (up to the annual IRA contribution limit), including opting out entirely. In absence of any election, 3% of an employee’s salary would be contributed to their IRA.
The Reason – For nearly 15 years, Congress, along with the Treasury Department and IRS, have been taking steps to increase Americans’ retirement savings contributions by making it easier for employers to establish auto-enrollment in company plans. However, many small businesses choose not to adopt a retirement plan due to the potential costs and/or compliance burden. Many small employers also do not take low-cost steps to make retirement savings easier for employees, such as through the adoption of payroll-deduction IRAs.
The Good – It’s no secret that our country is in the midst of a retirement savings crisis. Too few Americans actively save for retirement, and even fewer save appropriate amounts. Although there is some debate as to how effective this proposal would be in reducing the gap between what people are saving and what people should save for retirement, numerous studies have shown that auto-enrollment tends to increase participation in retirement savings. The proposal also contains a number of credits small businesses could claim for helping to facilitate employees’ retirement savings.
The Bad – Many small businesses are already overburdened with various compliance requirements and any new rules or regulations could be unwelcomed by small business owners.
2) Mandatory 5-Year Rule for Non-spouse Beneficiaries
The Proposal – IRA (and other retirement account) beneficiaries would be required to empty inherited retirement accounts by the end of the fifth year after the year of the IRA owner’s death.
The Reason – The “Green Book”, released by the Treasury Department to explain the proposals in the President’s budget(including the reasons for making such proposals) said the reason for this provision is that “The Internal Revenue Code gives tax preferences for retirement savings accounts primarily to provide retirement security for individuals and their spouses. The preferences were not created with the intent of providing tax preferences to the non-spouse heirs of individuals.”
The Good – Right now, the required minimum distribution rules for non-spouse beneficiaries can be somewhat complex. Requiring all non-spouse beneficiaries to withdraw inherited retirement account funds within five years would simplify the rules, for both clients and advisors. Plus, the proposal exempts certain beneficiaries, such as disabled beneficiaries and minor children.