Congress may be officially in recess, but bills continue to appear during the state and district work period for senators and representatives. Sen. Sheldon Whitehouse (D-RI) has introduced the Automatic IRA Act of 2019 (S. 2370). The legislation would mandate that most employers that do not offer their employees another type of retirement plan, establish an automatic enrollment, payroll deduction program with contributions withheld from employee pay and contributed to an IRA or retirement bond. The legislation is intended to address the lack of a workplace retirement savings program for many private sector employees. Estimates vary, but suggest that between 33 and 40 percent of this workforce has no workplace plan.
Much more comprehensive retirement legislation has already been passed this year by the U.S. House of Representatives—the Setting Every Community Up for Retirement Security (SECURE) Act—and is pending in the Senate. Nevertheless, this legislation too will be monitored when Congress returns in September for the remainder of the 2019 session.
In many respects, S. 2370 resembles automatic enrollment IRA legislation introduced in several prior sessions of Congress by fellow Democrat Richard Neal (D-MA), the House Ways and Means Committee Chairman. It contains the following provisions.
- Most employers that do not offer a retirement plan, and had more than 10 employees earning at least $5,000 in the preceding calendar year, would be required to offer a “qualifying automatic IRA arrangement.” Also exempt would be certain new businesses, government entities, and churches.
- Employers with existing retirement plans that are frozen, have had no contributions for three plan years, or provide only discretionary contributions, would not be exempt by virtue of maintaining such plans.
- In general, employers that are required to participate in a qualifying state-facilitated retirement program for private sector workers would not be required to establish this federal automatic IRA plan.
- The employees of multi-state employers would be covered under the rules of respective qualifying state-facilitated programs, or under the federal program in the case of a state with no such program. Such multi-state employers could instead irrevocably elect to have their employees in all states covered under the federal program.
- Qualifying state programs could be multi-state consortiums.
- As an alternative to automatically enrolling all eligible employees, an employer could request affirmative elections to contribute, but automatically enroll those who do not make an election.
- Certain employees need not be covered under such an arrangement, including those under age 18, those who have worked less than three (3) months for the employer, certain collectively-bargained or nonresident alien employees, and—in the case of certain employers that operate an exempting plan—employees that have not yet met eligibility requirements to participate in that employer’s 403(b), SEP, or SIMPLE IRA plan.
- A $100 penalty would be imposed on a covered employer for each otherwise eligible employee not enrolled, unless due to reasonable cause and corrected within 90 days.
- Amounts withheld and contributed under the automatic IRA program would be at a rate of three percent of compensation, or other initial percentage as specified in future regulations by the Secretary of the Treasury, but not less than two percent or greater than six percent.
- Amounts withheld would be invested in a Roth IRA or Traditional IRA; Roth IRA unless otherwise elected.
- The Secretary of the Treasury may issue regulations providing for automatic deferral increases.
- Automatically withheld amounts would be required to be placed in certain classes of investments, including target date or life cycle funds, principal preservation funds, guaranteed lifetime income investments, a qualifying retirement bond, or “certain other funds determined by the Secretary.”
- Such automatic IRA arrangements would not be considered ERISA-governed pension plans if the Act’s provisions are met.
- Employees who elect-out of the arrangement and have automatic IRA contributions distributed to them within 90 days would not be subject to the 10 percent early distribution penalty tax.
- Automatic IRA contributions would be required to be remitted by the last day of the month following the month of withholding, or if later, by a deadline prescribed under Treasury regulations, but in no case later than the deadline for income tax withholding for the period. Fiduciary liability would apply for failure to meet this requirement.
- Notice and election period requirements would apply, generally including notification at least 30 days before the beginning of a year, or 30 days before an employee becomes eligible.
- An annual account statement would be required, much like all IRAs.
- In general, all IRA rules would apply.
- Small employers (100 or fewer employees) could be eligible for a tax credit for maintaining an automatic enrollment IRA arrangement for up to six years; to a maximum of $750 for the first year, and a maximum of $500 for the following years.
- The small employer retirement plan start-up credit would increase from a current maximum of $500 per year to a maximum of $5,000.
- Any state laws in conflict with H.R. 2035’s provisions would be preempted.
- The effective date, in general, would be 2021 and later years.