he Treasury Department today announced that President Bush
's Budget, to be announced Monday, will include two savings proposals covering all Americans that will dramatically change the retirement landscape.
The first includes Lifetime Savings Accounts
(LSAs) and Retirement Savings Accounts
(RSAs), which are to allow everyone to contribute regardless of age or income. Individuals will be able to convert existing accounts into these new accounts.
The second proposal, the Employer Retirement Savings Accounts
(ERSAs), is designed to promote and simplify employer sponsored retirement plans by consolidating 401(k), SIMPLE 401(k), 403(b), and 457 employer-based DC accounts into a single plan. ERSAs can be sponsored by any employer, according to the U.S. Treasury release.
The big winners look to be the large broker-dealers, such as Merrill Lynch, Smith Barney and Charles Schwab, while plan providers will have mixed responses depending on the scope and scale of their businesses. Indeed, Merrill Lynch recently released a statement that voiced the firm's general approval of the proposals.
Taking in the effect the President's dividend proposal as well, an industry veteran pointed out that the smaller players who only provide 401(k) recordkeeping will be hurt, while a significant chunk of smaller-plan sponsors may terminate their 401(k) plans altogether. Also, most sponsors will have to spend more for education and communication efforts should the proposals pass the requisite legislative review and approval.
Treasury Assistant Secretary for Tax Policy Pam Olson
stated, "The overwhelming complexity of current rules imposes substantial burdens on employers and workers. Because employer sponsorship of a retirement plan is voluntary, this complexity discourages many employers from offering any plan at all. This is especially true of small employers who together employ about 4 out of every 10 American workers."
The proposals are already drawing opposition from Democrats, Rep. Charles Rangel
, ranking Democrat on the Ways and Means Committee, has called the plan the administration's "latest tax cut scheme," noting that these accounts would "mainly help the affluent shelter more money from taxes."
Under the proposed ERSA, both the definition of compensation and the minimum coverage requirement will be simplified and the top heavy rules will be repealed. Nondiscrimination requirements for ERSA contributions will be satisfied by a single test and it is expected to reduce employer compliance costs.
Meanwhile, the new RSA will consolidate traditional IRAs, nondeductible IRAs and Roth IRAs into one type of account with rules similar to current law Roth IRAs. Up to $7,500 (in addition to amounts contributed to an LSA) could be contributed to an RSA.
LSAs are designed to help Americans save in one tax favored account for any purpose, including children's education, a new home, healthcare, or to start their own business. It will allow an individual, regardless of age or income, to contribute $7,500 a year and make penalty free withdrawals at any time.
Read the Treasury's press release and Q&A on the proposed changes here.
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