The President's recent budget proposal would impose a new
cap on tax-favored retirement benefits.
Annual contributions and accruals under tax-favored plans are
already limited, but this would be a complex new limit determined
by how much of a pension could be provided by your IRA and your
401(k) accounts and qualified pension plans of ALL of your
employers. To the extent you exceeded the amount necessary to fund
the maximum annuity in a qualified pension plan, which the budget
proposal estimates at approximately $3.4 million today, you would
be barred from making any additional contributions or earning any
The proposal may have been a reaction to the huge IRA
accumulations Mitt Romney revealed during the election campaign. In
fact, Treasury's Undersecretary for Domestic Finance, Mary John
Miller, recently stated that the proposal would affect only a
fraction of 1% of the country. However, this ignores the
"trickle down" realities of retirement plans.
Here are some comments:
Most taxpayers and employers aren't actuaries. Who is
going to convert IRA and 401(k) balances into equivalent
How are employers supposed to get information about
benefits provided by prior and future employers?
How will investment performance affect the limits?
Investment earnings could continue under the proposal without
regard to the cap, but what if there is a negative return or an
investment's value sharply declines? What if additional
contributions are permitted for a temporary loss, and then the
At a time when we should be encouraging employers to
provide retirement benefits, imposing complex new obligations on
employers may actively discourage plan sponsorship. This will hit
the rank-and-file, not just the top executives.
Much has been written about the fact that many employees
are not saving enough to provide an adequate retirement income.
Under a system where employers can determine (within Code limits)
how much to provide for their employees, current law allows highly
compensated employees to receive greater benefits if they provide
more for the rank-and-file. The cap will remove this incentive, as
executives who have reached the cap and are getting no plan
benefits themselves may not want to provide for their
A separate part of the budget proposal has a new deduction limit
that includes employee IRA and 401(k) contributions. This could
also provide a disincentive for employers to provide more for their
Some practitioners believe that this proposal can't be
enacted and the real goal is to minimize objections to a reduction
in the current contribution and accrual dollar limits. Regardless
of whether they are right, all of those who would be affected by
the proposal – which means all of us – should let the
Administration know that this proposal is the wrong retirement
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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