A budget deficit-cutting proposal from President Obama releasedWednesday that calls for capping the value of individual retirementaccounts at $3 million would significantly impact the growth of theretirement market in coming years, according to an analysis byEmployee Benefit Research Institute.

Small business owners, a core customer for credit unions, wouldbe significantly impacted by the proposal, according to Brian H.Graff, executive director and CEO of the American Society ofPension Professionals & Actuaries. He warned of the potentialdevastating impact if the proposal was enacted on small-businesspeople.

He said that is “grossly unfair” that under the cap proposal asmall business owner will be limited to retirement benefits thatare nowhere near as valuable as executives' at largecorporations.

He said small business can't use the nonqualified deferredcompensation arrangements that provide millions, even billions ofdollars in retirement benefits to big corporate executives. “Everytime retirement plan limits are cut, the corporate CEOs get morenonqualified retirement benefits. It's the small business ownersand their employees who lose out and it just isn't fair,” Graffsaid.

He said that if the president's plan becomes law, a smallbusiness owner has saved $3 million in his or her 401(k) account,won't be allowed to save any more—and will have to pull out and paytax on any balance over that amount. Without any further incentiveto keep the plan, many small business owners will now either shutdown the plan or reduce contributions for workers. “This means thatsmall business employees will now lose out not only on theopportunity to save at work, but also on contributions the ownerwould have made on the employee's behalf to pass nondiscriminationrules,” Graff said.

“The proposed retirement savings cap in the president's budgetis not closing a loophole and is not correcting some perceivedabuse of the rules,.” Graff added. “Rather small business ownershave been playing by the rules all along. They saved each yearwithin federally dictated contribution limits and they providedmatching and other contributions to their employees to comply withfederally mandated nondiscrimination rules. Now these smallbusiness owners are being punished for doing right by their workersand saving and investing successfully,” he said.

Robert Smith, president of the National Association of Insuranceand Financial Advisors, added another concern.

“The current tax code already has contribution limits toretirement savings programs, including IRAs, and, therefore, limitson account balances is detrimental to conscientious taxpayers whohave made current sacrifices for future security.”

The budget also contains chestnuts from past administrationbudgets that would impose de facto tax hikes on other industryproducts, but these are seen as having little likelihood ofbecoming law, according to officials at Washington Analysis, whichadvises institutional investors and hedge funds.

One proposal would subject the dividend received deduction forgeneral account dividends to the same flat proration percentagethat applies to non-life companies under current law (15%).

Another would base the DRD for separate account dividends on theproration of reserves to total assets of the account.

NAIFA's Smith warned that, “Planning for your future financialsecurity is about managing risks and needs, and NAIFA members helptheir clients consider a range of factors when planning forretirement, including life's unexpected needs.

“There should be no limit on the need that life insurance andannuities will address, so how can you limit the vehicles you use(such as IRAs) to address those needs?” Smith asked.

Smith “encouraged” Congress to carefully consider the negativeconsequences of arbitrary caps. “What may seem to be too muchprotection for some, will inevitably be too little protection forothers,” he said.

The potential impact of the retirement cap proposal waslaid out in stark detail by EBRI.

The data implied that the proposal, if enacted, would snowballover time on growth of the U.S. retirement savings industry.

Specifically, EBRI said that based on an analysis of itsdatabase, that as of 2011, just 0.03% of the approximately 20.6million accounts had more than $3 million in assets.

About 0.06% of the total account holders (some individuals ownmore than one account), and about 0.11% of account holders who areage 60 or older surpass the threshold, EBRI officials said.

However, based on inflation, 2.2% of those currently ages 26–35will be affected by the $3 million cap (adjusted for inflation),compared with just 0.1% of those ages 56–65.

And, at the $2.2 million level cited above, 6.0 percent ofyounger retirement savers would be affected by age 65, comparedwith 0.3 percent of those ages 56–65, EBRI said.

Additionally, when age adjustments are factored into assetallocation, 4.2% of those aged 26–35 would be affected by a $2.2million cap, EBRI said.

“Those closer to retirement would be less likely to exceed thethreshold by the time they reach age 65,” EBRI officials said.

The proposal to expand pro rata interest expense disallowancefor Corporate-Owned-Life Insurance would reduce the tax advantagesfor companies that buy insurance for their employees, and wouldlikely reduce the demand for COLI, Schoen and others said. Last year this proposal was estimated to raise $7.3 billion over 10years.

The proposal by the White House released Wednesday calls for a$3.77 trillion spending plan that proposes modest new investmentsin infrastructure and education, major new taxes for the wealthyand significant reforms aimed at reducing the cost of SocialSecurity and Medicare.

The budget was released as Washington girds for anotherpotential showdown over the federal debt limit later thissummer.

Administration officials said in a background briefing that theblueprint lays down the president's “bottom-line offer for gettingfederal borrowing under control.”