Harkening back to the early days of the administration, President Biden’s fiscal year 2025 budget, once again, proposes significant tax increases on corporations and upper-income taxpayers, including a proposal to limit how much taxpayers are allowed to accumulate in their retirement plans.
According to the Treasury Department’s description, one of the budget’s revenue-raising proposals would modify rules relating to retirement plans by preventing “excessive accumulations by high-income taxpayers in tax-favored retirement accounts and make other reforms.” The White House estimates that these changes would raise $23.6 billion over the period 2025-2034.
Distributions of excess retirement plan accruals: The proposal would impose special distribution rules on high-income taxpayers with large retirement account balances. As such, a high-income taxpayer with an aggregate vested account balance under tax-favored retirement arrangements that exceeded $10 million in a preceding calendar year would be required to distribute a minimum of 50% of that excess. The arrangements included in this calculation would be:
- defined contribution plans to which Internal Revenue Code Section 401(a) or 403(a) applies;
- annuity contracts under Section 403(b);
- eligible deferred compensation plans described in Section 457(b); and
- IRAs.
If the high-income taxpayer’s aggregate vested account balance exceeds $20 million, then the required distribution is subject to a floor, which would be the lesser of (a) that excess and (b) the portion of the taxpayer’s aggregate vested account balance that is held in a Roth IRA or designated Roth account.
A taxpayer is considered to be a high-income taxpayer if their modified adjusted gross income is over $450,000 if married and filing jointly (or filing as a surviving spouse); over $425,000 if the taxpayer is a head-of-household; or over $400,000 in other cases.
The taxpayer would generally be permitted to choose from which plan the required distribution is paid, but if the floor applies, then the distribution must come first from Roth IRAs and then from designated Roth accounts. In addition, the taxpayer may not specify that any of the required distribution come from an employee stock ownership plan (ESOP) to the extent the account under the ESOP holds employer securities that are not readily tradable on an established securities market.
Under the proposal, plan administrators would be required to report to the Department of Treasury the vested account balance of any participant or beneficiary for whom the vested account balance exceeds $2.5 million (adjusted for inflation).
As part of this excess accumulation proposal, the FY 2025 budget also includes four additional revenue-raising components.
Limit rollovers and conversions to designated Roth accounts or to Roth IRAs. To address the so-called “back-door” Roth IRA strategy and a similar one for retirement plans, the proposal, among other things, would prohibit a rollover to a Roth IRA of an amount distributed from an account in an employer-sponsored eligible retirement plan that is not a designated Roth account (or of an amount distributed from an IRA other than a Roth IRA) for a high-income taxpayer. The provision would also prohibit rollovers or transfers of amounts that are not held within a designated Roth account into a designated Roth account for a high-income taxpayer.
The proposal also would prohibit a rollover of a distribution from a tax-favored retirement arrangement into a Roth IRA unless the distribution was from a designated Roth account within an employer-sponsored retirement plan or was from another Roth IRA if any part of the distribution includes a distribution of after-tax contributions. Similarly, the proposal would prohibit a rollover of a distribution from a tax-favored retirement arrangement into a designated Roth account if any part of the distribution includes a distribution of after-tax contributions, unless it was from a designated Roth account.
Clarify disqualified persons for purposes of IRA prohibited transactions. The proposal would clarify that the individual for whom an IRA is maintained is always a disqualified person for purposes of prohibited transaction rules.
Prohibit IRA purchase of a DISC or FSC ownership interest. The proposal would prohibit an IRA from holding an interest in a DISC or FSC that receives a payment from an entity owned by the IRA owner. The sanction for a violation of this prohibition would be the same as the sanction for an IRA owner engaging in a prohibited transaction (i.e., the IRA would be deemed to have distributed all of its assets as of the first day of the taxable year).
Extend the statute of limitations. The statute of limitations in the case of a substantial error relating to valuation of assets with respect to an IRA would be extended from three years to six years. The proposal would also extend the statute of limitations for the excise tax on prohibited transactions from three years to six years.
Budget Overview
Overall, the FY 2025 budget proposes roughly $7.3 trillion in spending and $5.5 trillion in revenues, resulting in an annual budget deficit of $1.85 trillion. The budget also seeks to reduce the federal budget deficit by a net $3.3 trillion over the next decade through additional tax reforms described as ensuring that “the wealthiest Americans and biggest corporations finally pay their fair share.”
“So far, we have already cut the deficit by $1 trillion since I took office, one of the biggest reductions in history, and I have signed legislation to cut it by $1 trillion more. My budget would reduce it by another $3 trillion over the next 10 years as well, while continuing to pay for our investments in America. And we are just getting started,” President Biden said in his budget statement.
Beyond the proposal to cap total retirement plan accruals, the budget includes funding to implement the “significant reforms to employer-sponsored retirement plans enacted in the SECURE 2.0 Act of 2022, helping to ensure that workers’ retirement plans are always protected.”
The president also vows to protect Social Security and Medicare without making any cuts to current benefits. “The President remains committed to working with the Congress to protect and strengthen Medicare and Social Security for this and future generations and strongly rejects Congressional Republicans’ attempts to cut benefits for hardworking Americans,” the budget explains.
To that end, the budget states that “the Administration looks forward to working with the Congress to responsibly strengthen Social Security” based on the following principles:
- Opposing policies that cut benefits, as well as proposals to privatize Social Security;
- Extending solvency by asking the highest-income Americans to pay their fair share;
- Improving financial security for seniors and people with disabilities by supporting efforts to improve Social Security benefits; and
- Ensuring that Americans can access the benefits they have earned.
DOL Budget
Overall, the FY 2025 budget requests $13.9 billion in discretionary budget authority for the Department of Labor (DOL) for 2025, a $318 million or 2.3% increase from the 2023 level.
For the Employee Benefits Security Administration, the budget requests, among other things, that $206 million remain available until Sept. 30, 2026, of which up to $3 million shall be made available until expended for the procurement of expert witnesses for enforcement litigation.
The budget also seeks to support the DOL’s work to ensure that employers’ use of automated employment systems, including those that incorporate AI, does not result in discrimination against employees or job applicants.
It also proposes to significantly increase penalties for employers that violate workplace safety and health, wage and hour, child labor, equal opportunity, and labor organizing rules.
What’s Next?
The submittal of a president’s budget is typically one of the first steps in the annual budget policy debates between Congress and the president. Congress will now develop its own set of budget and spending proposals for fiscal year 2025, which begins Oct. 1, 2024. Note, however, that lawmakers are still trying to finalize all the spending bills for FY 2024.
While the budget has essentially been declared “dead on arrival” by congressional Republicans who control the House of Representatives, it continues to serve as a marker on the Biden administration’s priorities.
Fiscal Year 2025 Budget Proposal (with summary tables)
Treasury “Green Book” Description of Revenue Proposals