Small-business groups have joined the chorus of retirementprofessionals upset with President Barack Obama's proposedretirement cap.

Opposition to the plan emerged almost immediately. The proposed$3 million cap on retirement savings could force small businessesto stop offering workplace retirement plans, the American Societyof Pension Professionals & Actuaries said shortly after thepresident's plan was unveiled earlier this month.

The criticism hasn't stopped.

“Obviously it won't hurt every small business, but there are asignificant number it will hurt,” said Judy Miller, director ofretirement policy at ASPPA.

In his budget blueprint, President Obama proposed a $3.4 millioncap on how much money individuals can put into retirement accounts.The move would raise about $9 billion for the federal governmentover the next 10 years. The cap would prohibit taxpayers fromtaking advantage of the pre-tax deferral into their 401(k) ordefined contribution pension plans after they cross that $3 millionthreshold, which is enough to fund a $205,000 annual annuity for aperson wanting to retire at age 62.

According to data from the Employee Benefit Research Institute,a very small percentage of IRA and 401(k) investors would beaffected by the cap. In 2011, only 0.06% of total IRA accountholders had $3 million and only 0.0041% of 401(k) accounts had thatmuch money in them at the end of 2012.

Still, the proposal is alarming on two levels, Miller said.

Small-business owners can't rely on so-called non-qualifieddeferred compensation like big companies can, so their options arelimited, she said. A company-sponsored retirement plan is asmall-business owner's only way to generate tax-deferred savings,unlike executives at large companies, who can “get pretty muchanything, no limit,” Miller said.

Non-qualified deferred compensation is money that workers earnin one year but that is paid out in a future year, helping to lowertax liabilities.

It makes for a very uneven playing field, Miller said. “Wereally count on the nondiscrimination rules related tocontributions to employer-based plans,” Miller said, adding:

“You take away the incentive they previously had to makecontributions to other people and you're going to end up with a lotof people, who are not intended to be the target, losing out underthis proposal.”

Paula Calimafde, chair of the Small Business Council of America,doesn't go quite as far but is critical of other components of theproposal.

She doesn't think that the $3 million cap will hurt the systembecause, mostly, such a small percentage of individuals would beaffected by the cap.

The proposed cap would be preferable to proposals that came outduring the fiscal cliff talks at the end of last year that wouldlimit contributions going into a plan to the lesser of 20 percentof earnings or $20,000 per year.

That scenario would “trigger plan terminations or plans beingfrozen in the small-business sector because with the small-businesssector, what makes the retirement plan system work is taxincentives,” she said. “If they are not strong enough to carry theweight of the internal administrative burdens and the cost ofrunning a plan, including the cost of contributions for non-highlycompensated employees, the owners will walk away from it.”

She added small business owners are more willing to sponsor aretirement plan and give employee matches or offer profit sharingif they have incentives to do so.

Calimafde pointed out that changes made to the tax incentives inthe 1980s forced many small business owners to close or freezetheir workplace retirement plans.

Ed Ferrigno, vice president of Washington Affairs for the PlanSponsor Council of America, pointed out the $3 million cap alsowould apply to defined benefit plans.

“It complicates the hell out of things, particularly on thedefined benefit side,” he said.

Specifically, it would make it harder for small businesses toknow which of their employees had maxed out their benefits andmight be ineligible to set aside additional tax-deferredcontributions. Many people have investment accounts outside oftheir workplace-sponsored retirement plan.

Both Calimafde and Ferrigno believe another “sleeper” provisionin Obama's proposed budget could have even more far-reachingconsequences than the cap.

The proposed elimination of the “stretch” IRA — which allows theamount remaining in an IRA at an employee's death to be distributedover the life expectancy of the beneficiaries who inherit it —would deter employees from fully using IRAs as a means of savingmoney.

As part of the president's proposed budget, individuals who savemoney in an IRA would have a harder time passing that money on totheir children or grandchildren because the rules would force thesesecondary beneficiaries to take all of the money from that planwithin five years of the account holder's death.

The money would be taxed at a much higher rate if thebeneficiaries are forced to take a large sum of money out of an IRAimmediately, Calimafde said.

“It is important to many individuals who have accumulated fundsthat they can name their children as beneficiaries. This is why,for most employees, IRAs are a preferable alternative toannuities,” the Small Business Council of America said in commentsthis month to the House Ways and Means' Working Groups onPension/Retirement and Small Business.

“With the 'stretch IRA' employees can invest in an IRA not onlyto secure their own retirement future but knowing that anyremaining funds can provide their children with a safety net byallowing them to take the funds out of the IRA over their lifetimesrather than being forced to take the funds out in a lump sum ascalled for in this proposal,” according to the SBCA.

This article was originally posted at BenefitsPro.com, a sistersite of Credit Union Times.