The federal budget President Obama proposed Wednesday contains a provision limiting IRA and defined contribution plan accumulations to $3 million. Alternatively, it seeks to accomplish the same goal by imposing a limit based on the cost of purchasing an annuity equivalent to the top benefit allowed for defined benefit plans. Even before the plan was unveiled, the Employee Benefit Research Institute began analyzing its possible impact.
At the same time, the proposal has been blasted as a “plan killer” by Brian Graff, executive director and CEO of the American Society of Pension Professionals and Actuaries. “As business owners reach the cap, they will lose their incentive to maintain a plan, and either shut it down or greatly reduce benefits,” he said in a statement prior to the budget proposal’s release. “This would leave workers with a greatly diminished plan or without any plan at all,” he predicted.
Jason Hammersla, speaking for the American Benefits Council, said the organization in principle opposes imposing taxes on retirement plans, and is waiting for the fine print to reveal key details.
EBRI’s analysis looks at the number of plan participants who might be impacted — both immediately and in the future, based on various assumptions. As one would expect, the number of participants is very small in percentage terms, but as Graff noted would likely hit business owners or key employees whose continuing support for the plans could be important to their survival.
If combined IRA and 401(k) assets are to be counted toward a $3 million cap, about .0041% of accounts would be affected, according to EBRI’s analysis. Older participants (60 and above) are more likely to be hit — .107%, EBRI projects.
If the cap applied to married couples, the impact would be greater still.
In either case, the impact would grow over time. For example, 1.2% of participants in the 26-35 age bracket would be affected by the time they reach retirement and, with inflation, the dollar would have less value.
If the mechanism that would establish the cap isn’t a fixed dollar amount like $3 million but instead tied to the cost of purchasing a $205,000 annuity (i.e. the current Section 415(b) limit for defined benefit plans), “the account balance threshold would fluctuate over time, based on discount rates,” EBRI notes. In 2006, before interest rates were forced down dramatically by the Fed, the actuarial equivalent of the $205,000 threshold would have been as low as $2.2 million. At that level, about 3% of 401(k) accounts would be impacted, according to EBRI. As interest rates rise above the levels prevailing in 2006, the threshold would grow smaller.
None of the analysis factors in “the administrative complexities of implementation and monitoring such a cap,” EBRI points out.
Opponents of the measure may fear that if the principle of the cap were adopted even with a relatively high threshold, the door would be opened for future downward adjustments, broadening its impact.
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