Federal Retirement Legislation Aims to Expand Auto-IRA Program
The $3.5 trillion federal budget plan contains a retirement mandate, refundable Saver’s Credit, and new limits to wealthy retirement savers’ tax favorability. Lawmakers hope to shore up funding for retirees, prevent overreliance on Social Security, and close the gaps between the haves and have-nots. If passed, the plan would go into effect in 2023, which gives companies plenty of time to decide whether to create an employer-sponsored plan to offer workers instead.
What’s In the Retirement Mandate Proposal?
The retirement mandate would compel all businesses with five or more employees who don’t currently offer a retirement plan to automatically set aside 6% of new workers’ income into a low-cost IRA plan, with automatic escalations up to 10% over time. Workers can choose to opt out of the plan, and employers are not required to contribute a match. To help offset administrative costs, the proposal includes tax incentives for small business employers – or a $900/year tax penalty per employee per year for failure to comply.
The U.S. Treasury would also make the Saver’s Credit refundable and contribute $500 to $1,000 per year to each account. Currently, there is a nonrefundable tax credit, which reduces one’s overall tax bill, but does not accrue interest and growth in a retirement savings account.
Wealthy savers making over $400,000, on the other hand, would see new caps on tax favorability. Individuals with retirement accounts worth more than $10 million would be prohibited from contributing additional savings and would have to take a new required minimum distribution each year. The bill also seeks to repeal Roth conversions in IRAs and 401(k)s in the so-called “mega-backdoor Roth” strategy.
Why Is the Government Proposing Retirement Legislation Now?
A third of American workers in private industry didn’t have access to an employer-sponsored retirement savings vehicle like IRAs or 401(k) plans in 2020, according to government data. Part-time workers, service-sector employees, and minimum wage workers were the least likely to receive assistance in setting money aside for retirement. Workers are 12 times more likely to save for retirement when given the chance to do so through an employer plan.
Is This Federal Retirement Plan Any Good?
When states like Illinois, Oregon, and California enacted retirement mandates, 51% of employers chose to create their own plans instead, according to research by Pew Charitable Trusts. This allows them to choose the plan design and offer competitive benefits to their workers, rather than sign up for the status quo. Plans like these can be effective at generating savings. Take Oregon, for instance, where $120 million has been saved since 2015, when the mandate was put in place; some 73% of employers were either “neutral” or “satisfied” with the OregonSaves program.
Will the Plan Be Implemented?
The House Ways and Means Committee approved the retirement mandate with a 22-20 vote on September 9. While the mandate did make its way into the budget bill, the proposal may still be debated and potentially altered during the markup sessions. Lawmakers plan to pass the budget through a process of reconciliation, which requires unanimous support from Democrats, even if no Republicans vote in favor.
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Ubiquity is a low-cost, flat-fee small business 401(k) administrator with more than 20 years of experience helping employers and entrepreneurs build their retirement benefit plans. We offer traditional and Roth 401(k) plans, as well as SIMPLE, Solo, and Safe Harbors, all tailored to best align with your needs.
A 401(k) can be a great tool for talent attraction and retention, as well as a vehicle to meet your own personal retirement goals. Contact us to explore your options for small business retirement plans before the mandate goes into effect.