President Barack Obama's fiscal 2013 budget proposal marks his first formal attempt to trim tax incentives for retirement savings.
“Given that his first three budgets shielded retirement, the fact that the president has broadened his sights should give us pause,” said Derek B. Dorn, a partner in the Washington law firm of Davis & Harman LLP. Mr. Dorn is a former senior Senate tax aide whose clients now are plan sponsors and service providers.
The 2013 budget plan sent to Congress on Feb. 13 aims at reducing a $1 trillion deficit that threatens to mar the record of Mr. Obama's first term, which ends this year. The proposal would lower to 28% from 35% the exclusion for defined contribution retirement plan contributions and deductions for IRA contributions for taxpayers with adjusted gross incomes of more than $250,000 if married and filing jointly or $200,000 if single.
Now, a taxpayer in the 35% bracket generally saves $35 for every $100 put into a 401(k) plan, Mr. Dorn noted. Capping the value of that exclusion would generally limit the tax saving to $28 per $100 and make the $7 difference taxable.
Mr. Dorn estimates this change would result in as much as $174 billion in additional revenue to the federal government over 10 years, based on a review of the administration's projections.
Proponents of retaining the DC and IRA tax deductions as is are marshaling support in Congress, where more than 100 House members signed a resolution Feb. 16 saying that any tax reform measures should not change those incentives.
Another $13 billion of tax revenue over 10 years would come from eliminating the carried interest deduction for general partners in private equity and other alternative investments, who would pay regular income tax rates instead of the current 15% tax rate on carried interest.
Meanwhile, while the president called for a 5% overall budget reduction for the Department of Labor, funding for the Employee Benefits Security Administration would remain unchanged, with greater emphasis on electronic filing of Form 5500s. That form is the primary source of employee benefit plan data for the PBGC, the IRS and government auditors.
In their budget request, EBSA officials predicted an increased number of investigations and indictments in fiscal 2013 for improper calculation or payment of pension and health benefits.
The administration also proposed raising premiums charged by the Pension Benefit Guaranty Corp., adjusting them according to the funded status of pension plans to encourage companies toward full funding.
The premium increases, estimated to generate $16 billion in revenue over the next decade, would take effect after two years of study and public comment. Assistant Labor Secretary Phyllis C. Borzi said in an online press briefing that allowing the “PBGC to price insurance realistically would put PBGC's finances on a sounder footing.”
To handle increased regulatory and enforcement activity dictated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission budget calls for 191 new staffers in its enforcement division. The plan is to launch a series of risk-based initiatives “to identify hidden or emerging threats to the markets.” The focus of those efforts will be on money management firms that simultaneously manage structured products and investment funds; assets that are hard to value; and suspicious performance returns posted by hedge fund managers. The number of registered investment advisers under SEC oversight has grown over the last decade from 7,600 people managing $21 trillion in assets to 10,000 handling $44 trillion today.
The White House budget plan, which would also overhaul pay and benefits for members of the military and federal workers, is getting a chilly reception on Capitol Hill. Although House and Senate leaders have yet to formulate legislative proposals for 2013 spending, they have attacked Mr. Obama's ideas as not going far enough to cut the federal deficit or rebalance the tax code and are pushing for deeper cuts on government programs like Medicare and Social Security. “The president will veto any bill that takes one dime ... without asking the wealthiest Americans and biggest corporations to pay their fair share,” a White House statement said.
Speaking before the House Ways & Means Committee the day after the president's budget was delivered, Treasury Secretary Timothy Geithner argued that spending cuts alone would not address the federal deficit and pointed out that tax revenue from 2009 to 2011 as a share of GDP was at its lowest levels since 1950 because of individual tax cuts over the past decade that are “tilted toward the wealthy.”
With Mr. Obama seeking re-election this year, “it's quite clear that he will be running on a populist tax message,” said Mr. Dorn, the Davis & Harman attorney.