The Bush administration's proposed budget for the 2006 fiscal year (October 1, 2005 through September 30, 2006) would impact several areas of payroll processing. Remember, these are only proposals and we could see much debate in the months to come prior to the final budget being passed.

Tax Cuts

In 2001, the Economic Growth and Tax Relief Act (EGTRA) gradually phased in reduced federal income tax rates, created the 10% tax bracket and phased in standard deduction increases with broadening of the 15% tax rate bracket to eliminate the "marriage penalty" for married individuals. The child tax credit was gradually increased, with the non-job-related educational assistance benefit being extended and graduate level courses being added to approved education expenses. In 2003 and 2004, legislation was passed to accelerate many of the 2001 provisions, yet retained the "sunset provisions" that would end the tax changes on December 31, 2010. The current budget proposal would make permanent all of the EGTRA provisions beyond 2010.

Benefit Plans

The new budget proposal contains several benefit provisions, all with an effective date of January 1, 2006. Defined contribution plans (401(k), 403(b) and 457 plans) that allow tax free deferred and elective contributions would be consolidated into Employer Retirement Savings Accounts (ERSAs). Rules would be simplified and the new plan type would be available to all employers with rules closely following current 401(k) rules. The budget would consolidate the three types of current individual retirement accounts into a single Retirement Savings Account (RSA). This new plan type would be solely for retirement savings, with withdrawals for any other purpose subject to tax and penalty provisions. Current IRA types could be converted to an RSA.

Current non-retirement IRAs (Coverdale ESAs and 529 tuition plans) would be replaced by a new Lifetime Savings Account (LSA) that could be used for any purpose, such as health care and education, as well as supplemental retirement funds. Up to $5,000 per individual from all sources could be placed in a LSA, regardless of earnings. Contributions would not be tax deductible, but earnings on the accounts would accumulate tax free and all distributions would be excluded from the individual's taxable income, regardless of age or usage.

Employers would also be allowed to provide employees a computer, software or other office equipment tax free, to allow the individual to provide substantial work for the employer at home. As proposed, minimal usage for personal use would not create taxable income to the employee.

Other Proposals

Another budget proposal would consolidate and extend the Work Opportunity Tax Credit and Welfare-to-Work credit now scheduled to expire December 31, 2005. Penalties for violations of the Wage-Hour law would increase dramatically, from $11,000 to $50,000 for violations leading to death or serious injury. In lieu of overtime, employers in the private sector could offer compensatory time off, the same as government employees now receive.