Industry opposes Obama retirement limits

(AP photo/Susan Walsh) (AP photo/Susan Walsh)

A budget deficit-cutting proposal from President Obama released today that calls for capping the value of individual retirement accounts at $3 million would significantly impact the growth of the retirement market in coming years, according to an analysis by Employee Benefit Research Institute.

Robert Smith, president of the National Association of Insurance and Financial Advisors, added another concern.

“The current tax code already has contribution limits to retirement savings programs, including IRAs, and, therefore, limits on account balances is detrimental to conscientious taxpayers who have made current sacrifices for future security.”

The proposal was released this morning.

See also: Retirement planning for the next 4 years under President Obama

The budget also contains chestnuts from past administration budgets that would impose de facto tax hikes on other industry products, but these are seen as having little likelihood of becoming law, according to officials at Washington Analysis, which advises institutional investors and hedge funds.

One proposal would subject the dividend received deduction (DRD) for general account dividends to the same flat proration percentage that applies to nonlife companies under current law (15 percent).

Another would base the DRD for separate account dividends on the proration of reserves to total assets of the account. 

See also: 10 estate planning tax facts you need to know

Officials of the American Council of Life Insurers would only say regarding the cap proposal that, “we’re examining the cap proposal now.”

But, NAIFA’s Smith warned that, "Planning for your future financial security is about managing risks and needs, and NAIFA members help their clients consider a range of factors when planning for retirement, including life’s unexpected needs.

“There should be no limit on the need that life insurance and annuities will address, so how can you limit the vehicles you use (such as IRAs) to address those needs?” Smith asked.

Smith “encouraged” Congress to carefully consider the negative consequences of arbitrary caps. “What may seem to be too much protection for some, will inevitably be too little protection for others,” he said.

The potential impact of the retirement cap proposal was laid out in stark detail by EBRI.

The data implied that the proposal, if enacted, would snowball over time on growth of the U.S. retirement savings industry.

Specifically, EBRI said that based on an analysis of its database, that as of 2011, just 0.03 percent of the approximately 20.6 million accounts had more than $3 million in assets.

About 0.06 percent of the total account holders (some individuals own more than one account), and about 0.11 percent of account holders who are age 60 or older surpass the threshold, EBRI officials said.

However, based on inflation, 2.2 percent of those currently ages 26–35 will be affected by the $3 million cap (adjusted for inflation), compared with just 0.1 percent of those ages 56–65.

And, at the $2.2 million level cited above, 6.0 percent of younger retirement savers would be affected by age 65, compared with 0.3 percent of those ages 56–65, EBRI said.

Additionally, when age adjustments are factored into asset allocation, 4.2 percent of those aged 26–35 would be affected by a $2.2 million cap, EBRI said.

“Those closer to retirement would be less likely to exceed the threshold by the time they reach age 65,” EBRI officials said.

As to the other proposals, the DRD reduces the taxes that insurance companies have to pay on their investment portfolio, avoiding what would amount to triple taxation on dividends at the corporate, insurance company and policy-holder levels, analysts at Washington Analysis said.

In the White House’s 2013 budget, Ryan Schoen, et al, at Washington Analysis said this proposal is estimated to raise $7.7 billion over 10 years.

The proposal to expand pro rata interest expense disallowance for Corporate-Owned-Life Insurance would reduce the tax advantages for companies that buy insurance for their employees, and would likely reduce the demand for COLI, Schoen, et al, said. Last year this proposal was estimated to raise $7.3 billion over 10 years.

Schoen, et al, told investors that, “While we do not expect these proposals to materialize into law, they represent headline risk for life insurers.”

The proposal by the White House this morning calls for a $3.77 trillion spending plan that proposes modest new investments in infrastructure and education, major new taxes for the wealthy and significant reforms aimed at reducing the cost of Social Security and Medicare.

The budget was released as Washington girds for another potential showdown over the federal debt limit later this summer.

Administration officials said in a background briefing that the blueprint lays down the president’s “bottom-line offer for getting federal borrowing under control.”

Brian H. Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries, warned of the potential devastating impact if the proposal was enacted on small-business men, like insurance agents.

He said that is “grossly unfair” that under the cap proposal a small business owner will be limited to retirement benefits that are nowhere near as valuable as executives’ at large corporations.

Graff added that small business can’t use the nonqualified deferred compensation arrangements that provide millions, even billions of dollars in retirement benefits to big corporate executives.

“Every time retirement plan limits are cut, the corporate CEOs get more nonqualified retirement benefits. It’s the small business owners and their employees who lose out and it just isn’t fair,” Graff said.

He said that if the president’s plan becomes law, a small business owner who has saved $3 million in his or her 401(k) account won’t be allowed to save any more — and will have to pull out and pay tax on any balance over that amount. 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 small business employees will now lose out not only on the opportunity to save at work, but also on contributions the owner would have made on the employee’s behalf to pass nondiscrimination rules,” Graff said.

“The proposed retirement savings cap in the president’s budget is not closing a loophole and is not correcting some perceived abuse of the rules,” Graff added. “Rather small business owners have been playing by the rules all along. They saved each year within federally-dictated contribution limits and they provided matching and other contributions to their employees to comply with federally-mandated nondiscrimination rules. Now these small-business owners are being punished for doing right by their workers and saving and investing successfully,” he said.

David Stertzer, CEO of AALU, shares Graff's sentiment.

“Now is not the time to make it more costly for families and businesses to provide financial security with life insurance,” Stertzer said. “Congress should reject any effort by the administration to cap retirement savings in IRAs or impair effective estate planning by changing grantor trust rules. Congress has repeatedly rejected – on a bipartisan basis – changes to the way corporate-owned life insurance is taxed or to increase tax insurers’ burden through a change in DRD. They should do so again.”

The current tax treatment of life insurance products and insurers is correct and supports the financial security for 75 million American families, 20 percent of long-term savings, secure retirement annuities, and employee benefits. “

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