At Work

Why Do We Waste Our Time On This Stuff? Limiting retirement accruals 😡

Here is an excerpt of changes proposed in the Presidents budget. One has to wonder why this is an issue at all. If implemented, it would affect few workers and add yet more complexity to employer plans.

Overall Cap on Retirement Accumulations – The Administration’s budget again includes a complex proposal to place an overall cap on the amount of tax-favored retirement accumulations that any individual can enjoy. Under the proposal – which is technically described as limiting total contributions or accruals to the amount necessary to provide a maximum annuity (with 100% spousal continuation) of $210,000 at age 62 – the taxpayer’s overall accumulation would be calculated at the end of each calendar year, and would apply to contributions and accruals (but not earnings) in the following year. The limit (roughly $3.4 million based on todays’ interest rates) would be indexed and actuarially adjusted similar to Internal Revenue Code (“Code”) section 415(b) dollar limit for defined benefit plans. However, all of an individual’s tax-favored benefits – whether in defined benefit or defined contribution plans, including section 401(k), 403(b), and governmental 457(b) plans and IRAs – would have to be taken into account.

If the taxpayer received contributions or accruals exceeding the maximum permitted accumulation, the excess generally would be treated like an excess 401(k) deferral, i.e., –

▶️the excess would be currently includible in income,
▶️the excess could be withdrawn penalty-free within a grace period, but
▶️if not so withdrawn, it would be subject to tax again when distributed in a later year.

Various reporting requirements would be imposed on employers and financial institutions to enable individuals to track the limitations and presumably notify their employers if the limit applies to them.

This proposal follows in the footsteps of past efforts to cap the growth of tax-favored benefits, including the longstanding combined plan limitation under Code section 415(e) (included in ERISA and repealed in 2001), and the 15% excise tax on “excess accumulations” – a creature of the Tax Reform Act of 1986 that thankfully was repealed before it even took effect. The Administration claims this proposal would raise almost $30 billion over the 10-year budget period starting with 2017.

Excerpt from Groom Law memo

imageThe fact is the IRC already limits 401k and defined benefit pension contributions and the amount of compensation that can be considered for these plans. As long as the tax benefits are limited for higher paid individuals, it’s fair to ask why we need to limit total accruals.  

Effective January 1, 2016, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) remains unchanged at $210,000. For a participant who separated from service before January 1, 2016, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2015, by 1.0011.

The limitation for defined contribution plans under Section 415(c)(1)(A) remains unchanged in 2016 at $53,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2016 are as follows:

The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $18,000.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) remains unchanged at $265,000.

And remember, we are not talking about anything being tax-free. All the distributions from these plans are taxable and not at the lower tax rates for dividends and capital gains, but taxed as ordinary income. Further, these are not plans used by millionaires and billionaires, but average Americans. 

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1 reply »

  1. Simple, we don’t have a retirement policy in America, we have a tax/revenue policy. So, when the idiots in the beltway look at issues, they stop at the federal budget.

    Before ERISA, there were no real limits on the amount of benefits that could be provided to an individual plan participant; the only effective limitations were those that controlled the sponsor’s deductions under Section 404.

    Starting with plan years beginning after 1975, ERISA imposed benefit and contributions limitations at the individual level (in addition to the IRC 404 limits). The ERISA dollar limit on annual benefits from a defined benefit pension plan rose from $75,000 in 1976 to $136,425 in 1982 and was scaled back to $90,000/year following the passage of TEFRA (foisted on Reagan by a democratic Congress) – and remained at $90,000 from 1983 to 1987. Since then, despite a few tweaks, the annual dollar amount is now $210,000/year for those retiring at normal retirement age.

    The IRC 415(e) combined limit on defined benefit and defined contribution pension plans was discarded January 1, 2000. Prior to then, there were two separate tests – a 125% test and a 1.4 test (at least one member of Congress actually thought 125% and 1.4 were the same limit, one applied to dollars, one applied to percentages!).

    So, what the administration seeks is a new form of combined limit. It was bad policy in the prior century, it is just as bad policy in the current century.

    So, calm yourself, it is just the return of bad policy. As they say, those who cannot remember the past are doomed to repeat it (George Santayana).

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