By Ian Berger, JD
IRA Analyst

The Build Back Better Act of 2021, recently passed by the House Ways and Means Committee, includes a number of retirement plan provisions.  They were summarized in the September 22, 2021 Slott Report.

Two of those provisions are targeted at so-called “Mega IRAs.” One provision would prohibit additional contributions to a traditional or Roth IRA for a calendar year under certain circumstances. No contributions could be made if the value of someone’s retirement accounts exceeded $10 million as of the prior December 31 and the individual has income in excess of $400,000 (if single) or $450,000 (if married filing jointly). The second proposal would require these persons to receive distributions from their accounts to bring down the total value to $10 million. (There is a separate mandatory distribution rule for those with total account balances exceeding $20 million.)

Most individuals will not be affected by these provisions. For those who may be impacted, keep in mind that in determining whether someone has over $10 million in retirement benefits, the proposals take into account traditional IRAs, Roth IRAs and company defined contribution (DC) plans [i.e., 401(k), 403(b) and 457(b) plans]. The proposals do not take into account the value of company defined benefit (DB) plans, including traditional DB plans and cash balance plans.

These proposals are another reason why high-income small business owners may want to consider establishing DB plans. Even apart from the House bill, DB plans provide definite advantages. For example, deductible contributions to DB plans are not subject to IRS limits, unlike contributions to DC plans. Annual deductible contributions for older business owners can be especially high, in excess of $200,000, compared with a limit of $64,500 for DC plan contributions. And, a DB plan can be used in tandem with an existing DC plan or SEP IRA.

But there are certain tradeoffs for these tax benefits. DB plans have relatively high administrative costs, including the requirement to hire an actuary. Furthermore, contributions can fluctuate from year to year and may be required in years when the company is struggling. Finally, there are rules making it difficult to shut down a DB plan.

One caution about cash balance DB plans, which usually offer lump sum payments. A high-wealth individual looking to stay below the $10 million threshold by using a cash balance plan should not roll over a cash balance lump sum into his IRA. Doing so will bring the former cash balance assets under the restrictions of the House bill. However, the alternative to taking a lump sum (i.e., taking periodic payments out of the cash balance plan) would expose those payments to immediate taxation.

Finally, starting up a DB plan wouldn’t allow someone to roll over existing IRA or DC plan funds into the DB plan in order to avoid the $10 million threshold. DB plans can’t accept rollovers.


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