President's Budget Would Cap Savings Breaks, Expand Enforcement

The proposed 2015 budget highlights income inequality and tax fairness issues

By Stephen Miller, CEBS Mar 6, 2014

Although there is a broad consensus that President Barack Obama's 2015 budget proposal, released on March 4, 2014, has no chance of being enacted by Congress, the budget highlights the income inequality and tax fairnessissues that the administration would like Democrats to champion in the 2014 midterm congressional elections, in the hope that a future Congress might treat them more favorably.

For this reason it's worth considering how the proposed "wish list" (as the budget was described by Politico) would affect employer-provided retirement plans, regulatory enforcement and other aspects of employment law.

Caps on Retirement Plan Deductions

As in previous years, the proposed budget calls for limiting tax-advantaged defined contribution accounts, such as those in 401(k) and 403(b) plans, at the point they are estimated to provide an annual retirement income of $205,000 if converted to an annuity. This would currently translate into a cap of approximately $3.4 million in account value, to be adjusted annually.

In addition, the proposal would limit itemized deductions overall to 28 percent on income above $200,000 ($250,000 for joint filers).

"Tax-preferred savings accounts were intended to help middle class families save for retirement," the budget reads. "However, under current rules, some wealthy individuals are able to accumulate millions of dollars in these accounts, substantially more than is needed to ensure a secure retirement."

Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries, responded in a media statement:

"If a small-business owner has saved $3 million in his or her 401(k) account, or has a pension from another plan and a modest amount in their 401(k) or IRA, they won’t be allowed to save any more. Without any further incentive to keep the plan, many small-business owners will now either shut down the plan or reduce contributions for workers. This means that employees of small businesses will now lose out not only on the opportunity to save at work but also on contributions the owner would have made on their behalf to pass nondiscrimination rules."

Moreover, under what Graff termed the “double taxation” budget proposal, "small-business owners earning more than $250,000 would have to pay tax on contributions in the year the contributions are made and then pay tax at the full rate when contributions are distributed at retirement. This amounts to a penalty for saving through a 401(k) plan. Who could blame a small-business owner for thinking that if the government is going to penalize them for saving in a retirement plan, maybe they should not have that plan?"

Higher PBGC Premiums

The president's budget also authorizes the federal Pension Benefit Guaranty Corp. (PBGC) to raise by $20 billion over the next decade the premiums that employers pay to the agency to insure the solvency of their defined benefit pension plans. According to the budget proposal, "Congress has raised [PBGC] premiums twice since 2012, but rates remain much lower than what a private financial institution would charge for insuring the same risk."

The ERISA Industry Committee (ERIC), however, recently released a statement saying that it is "deeply troubled" by proposals that would further increase premiums paid to the PBGC by companies that sponsor pension plans and that more premium increases "will only further accelerate the demise of the pension system, as plan sponsors become increasingly discouraged from voluntarily providing pensions," with the result of "further harming retirement security and the participants the system is intended to help."

Increased Enforcement Budgets

As enumerated by the Department of Labor, the president's budget includes additional funds to step up enforcement of a wide range of employer regulations, including:

  • More than $41 million for Labor's Wage and Hour Division, "to ensure workers receive appropriate wages and overtime pay, as well as the right to take job-protected leave for family- and medical-leave purposes."

  • Nearly $14 million to combat the misclassification of workers as independent contractors, "which deprives them of benefits and protections to which they are legally entitled and disadvantages employers who comply with the law."

  • $5 million to create a State Paid Leave Fund, "to assist workers who need to take time off to care for a child or other family member."

  • $565 million for the Occupational Safety and Health Administration, "to foster employer compliance with safety and health regulations and inspect hazardous workplaces."

  • $377 million for the Mine Safety and Health Administration, "to help protect workers in one of our nation's most dangerous industries."

  • $107 million for the Office of Federal Contract Compliance Programs, which enforces equal employment opportunity at federal contractors.

  • $1.1 million to strengthen efforts to eliminate pay discrimination affecting women, "who earn significantly less than their male counterparts for comparable work, and to secure equal treatment for all workers."

Stephen Miller, CEBS, is an online editor/manager for SHRM.​

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