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President Obama’s FY 2015 Budget Proposal Contains Total Rewards Implications

by WorldatWork Staff

March 12, 2014 — Washington, D.C. — The latest version of President Obama’s federal budget proposal, while largely a political and philosophical statement and unlikely to receive serious consideration by Congress, includes a number of proposed provisions that would substantially affect employer-sponsored benefit plans. Obama’s Fiscal Year 2015 budget proposal, released on March 4, requests $3.9 trillion for the government operation; the White House Office of Management and Budget (OMB) released the detailed budget estimates by agency in conjunction with the proposal. As previously reported, the bipartisan budget deal reached in December 2013 essentially set the budgets and appropriations levels for 2014 and 2015, rendering the president’s budget largely inconsequential from a practical perspective. However, the president’s proposal does illustrate his administration’s policy priorities and approach for the coming year. Furthermore, several of these provisions could ultimately be taken from the budget and considered separately as federal revenue offsets for larger legislation or as stand-alone measures.

The thrust of the President’s proposal consists of continued investment in manufacturing, infrastructure and research and development, coupled with immigration reform and tax reform largely aimed at eliminating “loopholes” and minimizing deductions for high-income individuals. Generally, the proposal takes a less compromising tone than the FY 2014 Budget proposal, which was introduced as the president’s attempt at a “grand bargain” with congressional Republicans. Specifically, the 2015 budget does not contain the “chained Consumer Price Index (CPI)” calculation, which sought to raise revenue by replacing the current methodology used for calculating cost-of-living adjustments (and would have instituted a less generous annual rate of increase for Social Security payments). Most notably, as in the prior year’s budget proposal, the FY 2015 budget proposes reductions in the value of itemized deductions and other tax preferences (including employer-sponsored health insurance and employee retirement contributions) to 28 percent for high-income earners. The proposal would also implement the “Buffett Rule,” requiring wealthy millionaires pay at least 30 percent of their income (after charitable giving) in taxes. The budget also specifically addresses a number of other retirement and health benefit initiatives.

Retirement Savings

  • Like the 2014 budget, this proposal imposes a cap on the aggregate account balances and accruals in a taxpayer’s IRAs and employer-based plans – including defined benefit plans and 401(k) plans. Under the 2015 proposal, the cap is set at “an amount sufficient to finance an annuity of not more than $210,000 per year in retirement,” representing a cap of roughly $3.2 to $3.4 million. If the cap applies, contributions (or accruals) would be prohibited for the current year, but the taxpayer’s account balance could continue to grow tax-deferred without amounts being forced out via distribution and taxed. While the FY15 budget’s provision is worded in a substantially similar manner as the FY14 budget’s provision, the recent release does make a number of clarifications with regard to assumptions of a spouse’s age and simplified reporting for defined benefit plans. Of particular note, however, the 2015 provision is estimated to raise $28.4 billion over 10 years. This amount is about three times as high as the $9.3 billion that OMB had estimated the near identical provision in the FY14 budget would have raised. It is not immediately apparent why the figure has increased so dramatically.
  • In addition to the president’s MyRA proposal, the centerpiece of the president’s retirement policy agenda is once again the required automatic enrollment in IRAs for employees without access to a workplace savings plan. The proposal also includes a small employer tax credit and doubles the tax credit for small employer plan start-up costs.
  • The president’s budget proposes another $20 billion increase in Pension Benefit Guaranty Corporation (PBGC) premiums over ten years (beginning in 2017) by giving the PBGC Board of Directors the authority to adjust premiums in both single employer and multi-employer programs, “tak[ing] into account the risks that different sponsors pose.” It is unclear how the $20 billion would be divided between single-employer and multi-employer plans, or between flat-rate and variable-rate premiums. These premium increases would be applied on top of the $9 billion in increases previously enacted as part of Moving Ahead for Progress in the 21st Century (MAP-21) Act of 2012 and the $7.8 billion raised through the Bipartisan Budget Act.
  • The budget proposal includes a new provision imposing required minimum distributions (RMDs) on Roth IRAs during the lifetime of the owner and prohibiting individuals from making additional contributions to Roth IRAs after they reach age 70½. Under current law, RMDs must be made from a Roth IRA only after the owner dies, and the owner can make contributions to the Roth IRA after age 70½. In contrast, traditional IRAs are subject to RMDs during the owner’s lifetime and owners cannot contribute after age 70½. In addition, under current law designated Roth accounts within qualified employer-sponsored plans must make RMDs during the participant’s life.
  • The proposal prohibits so-called “stretch IRAs,” meaning that non-spouse beneficiaries of deceased IRA owners and retirement plan participants (that do not meet certain conditions) would be required to take inherited distributions over no more than five years. The Council has noted in meetings with lawmakers on Capitol Hill that such a prohibition could be problematic, particularly for defined benefit plans.
  • The budget eliminates or reduces required minimum distributions for IRAs and other tax-qualified retirement arrangements with “low balances” (an aggregate value not exceeding $100,000 as of the “measurement date,” with phase-ins up to $110,000).
  • Non-spouse beneficiaries of IRAs and qualified plans would be allowed to roll their distributions over within 60 days.
  • The budget proposal repeals – for publicly traded companies only – the deduction companies can currently take for employer stock dividends paid to the plan.
  • The budget proposal seeks to give the Internal Revenue Service (IRS) new authority to require electronic filing of the Form 5500 for all plans, including small employers.

Health Care

  • The 2015 budget proposal provides resources to continue to support implementation of the Patient Protection and Affordable Care Act (PPACA), including the Health Insurance Marketplace, premium tax credit and cost sharing assistance, and increasing federal support to states expanding Medicaid coverage for newly eligible low-income adults.
  • As in prior years, the proposal “implements payment innovations and other reforms in Medicare and Medicaid and other Federal health programs that encourage high-quality and efficient delivery of health care, improve program integrity, and preserve the fundamental compact with seniors, individuals with disabilities, and low-income Americans.” This is accompanied by $25 million over two years to monitor and prevent fraud, waste and abuse in the Health Insurance Marketplace.
  • The budget retains a modified version of last year’s proposal for income-related premiums. Specifically, the proposal would impose premium increases for beneficiaries in Medicare Parts B and D and impose a surcharge on Medicare Part B premiums for new beneficiaries and those that purchase near or full first-dollar Medigap coverage.
  • The budget proposes a program to align employer group waiver plan payments with average Medicare Advantage plan bids.

Other Total Rewards Issues

  • As in the previous year’s budget proposal, the president recommends a program to penalize and eliminate misclassification of employees as “independent contractors.” The budget proposal specifically includes $14 million to combat misclassification (identical to the prior year’s budget), including $10 million for grants to states to identify misclassification and recover unpaid taxes and $4 million for the U.S. Department of Labor (DOL) Wage and Hour Division (WHD) to investigate misclassification.
  • With regard to family leave issues, the budget also again proposes a $5 million “State Paid Leave Fund” within DOL to provide competitive grants that would help states cover the start-up costs of launching paid-leave programs. The budget proposal also provides an increase of more than $41 million for the DOL WHD for increased enforcement of laws addressing wages, overtime and family and medical leave.