Set aside for a moment the fight in Washington, D.C., over stopgap spending legislation. In his budget blueprint for 2014, President Obama has proposed a number of tax and other reforms that would mean big changes in how retirement is financed.
What Congress does over the next couple of days could either avoid or trigger a government shutdown. Either way, at some point after the crisis is resolved, the House and Senate are likely take up the following proposals, all of which would have lasting effects on anyone saving for retirement.
Automatic enrollment in IRAs
The president’s 2014 budget would require employers in business for at least two years that have more than 10 employees to offer an automatic IRA option to employees.
Contributions would be made to an IRA on a payroll-deduction basis. If an employer already offers a plan, it wouldn’t have to comply with this regulation, but if its current plan excludes certain segments of its employees from participating in the plan, the employer would have to begin to offer the automatic IRA to those excluded employees, according to an assessment by KPMG.
Obama included this provision in the 2014 budget because he wanted to turn the tide on a rising retirement crisis in the United States. According to a Treasury report, the number of U.S. workers participating in an employer-sponsored retirement plan has remained stagnant for decades at no more than about half the total workforce.
The administration has seen that automatic enrollment efforts can be very effective in raising the number of people participating in workplace retirement plans and believes that by forcing small companies to offer automatic enrollment in an IRA, the number of people saving for retirement will rise.
Under the proposal, employers could help their workers save without having to make contributions to the plan or having to comply with the Employee Retirement Income Security Act. All they would have to do is make their payroll systems available to transmit employee contributions to an employee’s IRA.
Employers with fewer than 100 employees that offer an automatic IRA could claim a temporary credit for expenses associated with the arrangement of up to $500 for the first year and $250 for the second year. They also could be entitled to an additional credit of $25 per enrolled employee, up to a maximum of $250 for six years.
If employers adopted a new qualified retirement, SEP or SIMPLE plan, they would receive a tax credit for their startup costs that would be doubled from the current maximum of $500 per year for three years to a maximum of $1,000 per year for three years.
Elimination of stretch IRA
The Obama budget would eliminate the stretch IRA that allows beneficiaries to stretch the proceeds from an inherited retirement account over their lifetime. Instead, non-spouse beneficiaries of retirement plans and IRAs would have to take full distribution of their inheritance within five years of the account holder’s death.
The only exceptions would be disabled or chronically ill individuals, someone who is not more than 10 years younger than the participant, or an IRA owner or a child who has not reached the age of majority. Those individuals would be allowed to take distributions from the deceased person’s retirement plans over the life or life expectancy of the beneficiary beginning in the year following the death of the participant.
If the beneficiary was a child at the time of the participant’s death, they would have to take a full distribution within five years of coming of age.
If beneficiaries are forced to take distribution of large sums of money early, they will be taxed at a higher rate than they would be if they could leave the funds in the participant’s account and take money out gradually.