Benefits & Compensation News

Obama budget also threatens to cap 401ks, mandate IRAs

If you’ve been following the federal government’s budget talks, you know this: It doesn’t have a spending problem, it has a money problem. And in an attempt to solve that problem, President Obama has suggested one change to the tax law that has kicked up a lot of dust on Capital Hill.

President Obama’s recently proposed budget includes a series of new proposals that would raise an estimated $580 billion in new tax revenue over the next decade — mostly via what amounts to tax increases on wealthy Americans.

401k cap criticized

One of more scrutinized proposals is one that would cap savings in a 401k plan at around $3 million dollars.

According to CNNMoney, the cap is based on the amount needed to finance an annuity of $205,000 per year in retirement. The cap could increase based on inflation.

Individuals’ balances would be checked at the end of the year, and no contributions would be permitted if a balance exceeds the limit.

Limiting the availability of tax-advantaged plans for big savers means more money in the federal government’s coffers.

The proposal has been met with a lot of skepticism.

The worry many critics have about it: By removing the advantages small business owners have to save in a 401k, many may close their company sponsored plans — or opt not to open them in the first place — leaving employees without the pre-tax investment option.

IRA proposal

The budget also calls for requiring employers with at least 10 workers to automatically enroll employees into an individual retirement account (IRA) — if they do not already sponsor a retirement savings plan.

Qualified employers would have to set up automatic post-tax payroll deductions of at least 3% for every employee, except for those employees who opt out of the IRA.

Since the money would be deposited after payroll taxes are withdrawn, all growth and withdrawals from the IRAs would be tax free.

The Obama budget proposal still needs to make it through Congress, where’s is expected to meet strong pushback. Stay tuned.

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