Photo courtesy of Cheddar
In a 22-20 vote, the House Ways and Means Committee approved the inclusion of a provision that requires companies without retirement plans to automatically enroll their employees in individual retirement accounts. In addition, it will expand the use of the saver’s credit. This provision is now part of Democrat’s $3.5 trillion soft infrastructure package.
Details of the Provision
The provision will go into effect starting January 1st, 2021, and will apply to all employers with more than 5 employees. It will require these employers to deduct at minimum 6% of workers’ paychecks and automatically increase that savings rate by 1% point each year thereafter until it reaches 10% of pay. Employees will be able to opt-out of, or change, their savings rate.
Employers will have the choice of multiple auto-IRA providers, each vetted by the Treasury Department. As a result, employees will be automatically enrolled in a diversified target-date fund within a Roth IRA unless they elect a traditional IRA or another investment option altogether; the options also include balanced and principal-protection funds. The provision also requires 401(k)-type plans to offer participants with balances over $200,000 the option to buy an annuity if their plans were created on or after the legislation’s start date.
As for the saver’s credit, the legislation will allow savers to qualify for the credit even if they have no federal income tax liability. This strays from the current credit structure, where individuals in lower tax brackets often owe little to no income tax and therefore don’t qualify. As such, the government will deposit a $500 saver’s credit, differing from the current credit of $1,000, into their retirement accounts.
Exemptions: aside from employers who already offer retirement plans, the following will not be subject to the provision:
- Companies with five or fewer employees;
- Companies that have been in business for less than two years;
- Employees under 21 years old;
- And part-time employees working less than 500 hours a year for at least two consecutive years.
Compliance: companies will be fined $10 per employee, per day for up to 3 months.
Effects and Significance
According to the Joint Committee on Taxation, the cost of this retirement provision is projected to be around $46.8 billion for the first decade. If passed, it will reduce the retirement coverage gap that currently affects 33% of private-sector workers, per U.S. Bureau of Labor Statistics data.
If passed, it will also allow states to continue operating, or developing, their own retirement savings programs – including California, Oregon, Illinois, and Maryland. Employers in these state-sponsored programs technically satisfy the federal requirement because they require companies to automatically enroll private-sector workers in IRAs if they don’t offer retirement plans.
More broadly, the provision will increase employee access to workplace retirement savings accounts – which many small businesses never offer; conversely, the provision might prove too strenuous for small business owners.
Democrats want the bill passed later this month in the House, where the party holds a narrow majority, however, the party is also increasingly divided on the bill. Its scale, cost, and provisions included have been the topic of debate for months now.
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