President Obama’s budget proposal for fiscal 2015 includes items from the State of the Union address, such as the new myRA retirement savings accounts and a minimum wage hike. The budget also includes proposals from earlier budgets, including limits on savings and benefits in tax-preferred retirement plans, a cap on tax preferences for employer-provided health and retirement benefits, and calls for higher Pension Benefit Guaranty Corporation (PBGC) premiums.

House and Senate committees held hearings on the budget proposal following its release. While the full proposal is unlikely to gain legislative traction, some provisions — especially those viewed as revenue raisers — could be attached to other legislative proposals.

Retirement proposals

Establish cumulative cap on retirement account balances

As proposed in the fiscal 2014 budget, tax-favored lifetime retirement benefits would be limited to the amount required to provide the maximum annuity permitted under defined benefit plans. The limit would apply to all tax-favored retirement arrangements, including defined benefit plans, defined contribution plans and individual retirement accounts (IRAs). (See “Proposed Lifetime Pension Limits: Less Than Meets the Eye,” Towers Watson Insider, March 2014.)

According to the Treasury Department’s Greenbook, the limits would be calculated as of the end of the calendar year and apply to contributions and accruals for the following year. If a taxpayer exceeded the limit, additional contributions and accruals would be prohibited, although the taxpayer could keep investment gains and earnings.

Raise PBGC premiums

The PBGC Board would be authorized to set premiums for single- and multiemployer plans, and the PBGC would be directed to consider risk when setting premiums. The budget states that additional premium increases “need to be carefully crafted to avoid worsening the PBGC’s financial condition and harming worker retirement security by driving healthy plans out of the system.” The budget proposal estimates $20 billion in premium increases for single- and multiemployer plans over the next 10 years.

Cap value of tax exclusion for retirement benefits

The value of itemized tax deductions and employee contributions to retirement plans and IRAs would be capped at 28% for taxpayers in higher tax brackets. There would be an adjustment in basis if a taxpayer’s deduction or exclusion for retirement contributions were limited. The provision has appeared in other proposals from the administration and has received attention from some lawmakers.

Establish automatic individual retirement accounts and new savings accounts

The budget would establish automatic payroll deduction IRAs — a long-standing proposal from the administration and some lawmakers. It also refers to the myRA proposal outlined in the State of the Union address. Under automatic IRAs, employers without retirement plans would be required to enroll their employees in direct-deposit IRAs. Employers that sponsor a retirement plan but exclude certain populations (such as all employees of a division or subsidiary) from eligibility would have to facilitate automatic IRAs for the excluded employees.

All employees who do not opt out would be automatically enrolled with default contributions set to 3% of compensation and contributed to a Roth IRA, although employees could choose different contribution amounts or traditional IRAs.

Relax rules for minimum required distributions from smaller accounts

The budget would eliminate minimum required distributions for taxpayers with aggregate retirement balances of $100,000 or less (up from $75,000 in the fiscal 2014 budget) on the measurement date and then would phase them in for those with aggregate balances between $100,000 and $110,000. Benefits under a defined benefit plan that had begun to be paid in any form of life annuity before the measurement date would not count in determining whether the individual’s retirement balances exceeded the threshold. In addition, Roth accounts would be subject to the same minimum distribution rules as traditional retirement arrangements.

Change the rules for inherited Individual Retirement Accounts

Non-spouse beneficiaries would be required to take distributions from inherited IRAs over a period of five years or less, unless the beneficiary was disabled, chronically ill or less than 10 years younger than the deceased. Minor beneficiaries would have to take the distributions within five years of reaching the age of majority. The provision has been under repeated legislative discussion as a revenue raiser and is expected to receive more attention this year. The budget also gives non-spouse beneficiaries the option to use a 60-day rollover for amounts inherited from employer retirement plans and IRAs.

Require electronic filing of Form 5500

The budget would allow the IRS to require the inclusion of tax-specific employee benefit plan information in electronically filed annual reports in the same way the Department of Labor (DOL) may require electronic reporting of information relevant to Title I of the Employee Retirement Income Security Act (ERISA). In addition, the IRS would have the authority to require electronic filing of Form 8955-SSA, which reports plan participants who terminate employment with a right to future benefits.

Health care proposals

The budget proposes to fully fund continued implementation of the Patient Protection and Affordable Care Act (PPACA) and to accelerate waivers for state innovation. The waivers allow states to opt out of PPACA requirements if their programs would provide affordable insurance coverage to at least as many residents as would be covered without the waiver, and the program would not increase the federal deficit. The budget would also expand and simplify the PPACA’s small employer tax credit.

The budget’s proposed cap on the value of itemized tax deductions and specified tax exclusions would also apply to “employer-sponsored health insurance paid for by employers or with before-tax employee dollars,” contributions to health savings accounts (HSAs) and Archer medical savings accounts (MSAs), and health insurance costs of the self-employed.

The budget would make the following changes to Medicare:

  • Adjust Medicare Advantage payments and align employer group waiver plan (EGWP) payments with average individual Medicare Advantage plan bids.
  • Reform the sustainable growth rate (SGR). The budget proposes a payment stability period for several years during which the Department of Health and Human Services would develop accountable payment models. Following the payment stability period, payment updates for physicians would be linked to participation in an accountable payment model. Congress has been developing similar SGR reforms.
  • Enact changes to Part B and Part D premiums and benefits. The budget would increase means-tested Part B and Part D premiums. Beneficiaries who purchased certain Medigap policies would pay a Part B premium surcharge. In addition, the budget proposes modifications to the Part B deductible for new beneficiaries, a new copayment for certain home health services and cost-sharing requirements to encourage low-income beneficiaries to choose generic medications.
  • Reduce the growth rate at which the Independent Payment Advisory Board must issue a cost-reduction proposal.

Compensation and governance proposals

As in previous budget proposals, the fiscal 2015 budget would expand the pro rata interest expense disallowance for corporate-owned life insurance (COLI) to cover employees, officers and directors (other than 20% owners) of the business that owns or is the beneficiary of the life insurance contract.

The budget funds the continued implementation and enforcement of the Dodd-Frank Wall Street Reform and Consumer Protection Act, increasing funding for the Securities and Exchange Commission and the Commodities Futures Trading Commission.

The budget would tax carried interest at ordinary income tax rates and require partners to pay self-employment taxes on the income. It would also require the use of average cost basis rather than “specified identification” where a taxpayer has identical securities with a long-term holding period.

Other provisions

The budget also proposes to:

  • Call on Congress to increase the minimum wage from $7.25 to $10.10 per hour for all workers
  • Establish an additional credit for certain dependent care expenses for children under age five
  • Index all penalties in the Internal Revenue Code for inflation
  • Require the Social Security Administration to restructure federal wage reporting, including moving from annual to quarterly reporting
  • Call on the DOL and Treasury to address worker classification, including requiring Treasury to issue prospective guidance and require the prospective reclassification of misclassified workers

Budget documents are available from the Office of Management and Budget and the Treasury Department: