The House Ways and Means Committee this week will consider legislation requiring employers without employer-sponsored retirement plans to automatically enroll their employees in IRAs or 401(k)-type plans.
Committee Chairman Rep. Richard Neal (D-MA) announced Sept. 7 that the Committee will begin consideration of legislative proposals under the budget reconciliation process on Thursday, Sept. 9 and Friday, Sept. 10, 2021. The Committee’s markup will include measures spanning from universal paid family and medical leave and access to child care, to strengthening retirement savings and trade programs that prioritize American workers.
In addition to requiring most employers to begin automatically enrolling their employees in IRAs or 401(k)-type plans, the retirement portion of the legislation includes:
- the establishment of a new type of Section 401(k) deferral-only arrangement;
- an increase in credit limitation for small employer pension plan startup costs, including for automatic contribution arrangements;
- a credit for certain small employer automatic retirement arrangements;
- modification of the Saver’s Credit by turning it into a government-based matching contribution and making it refundable; and
- clarifying the deadline to contribute to an IRA with a tax refund.
A livestream of the meeting can be viewed via a live webcast accessible at the Ways and Means Committee’s website. The various legislative titles to be marked up can also be accessed at the site.
Automatic Contribution Plans and Arrangements
The legislation would require most employers that currently do not offer access to a retirement plan to begin automatically enrolling their employees in IRAs or 401(k)-type plans. For those employers failing to offer or maintain an automatic contribution plan or arrangement, the proposal generally imposes an excise tax of $10 (adjusted for inflation) on any failure with respect to an employee for each day in the noncompliance period.
There are four general categories of automatic contribution plans and arrangements under the proposal:
- a DC plan that is a qualified retirement plan, qualified annuity plan or 403(b) plan that includes a qualified cash or deferred arrangement or a salary reduction arrangement and meets the requirements relating to notices, eligibility, contribution, investment, fees and lifetime income;
- an automatic IRA arrangement, which also must meet requirements relating to eligibility, contribution, investment and fees;
- a SIMPLE IRA that meets the requirements relating to notices, contribution, investment and fees; and
- a grandfathered plan, which would include qualified plans or arrangements established and maintained by an employer as of the date of enactment. Section 403(b) plans that are not subject to title I of ERISA and that offer annuity contracts or custodial accounts as of the date of enactment would also be grandfathered.
The automatic contribution percentage would start at 6% for qualified employees and would auto-escalate up to 10% during the fifth plan year and thereafter.
Certain categories of employers would be exempted from the excise tax. For instance, it would not apply to an employer to the extent the employer participates in an arrangement under a qualified state law. The tax also does not apply to employers that have no more than five employees receiving at least $5,000 of compensation from the employer for that year. The tax also would not apply to a governmental plan or church plan, or to any employer that has been in existence for less than two years, taking into account all predecessor employers.
The proposal is effective for plan years beginning after Dec. 31, 2022.
Deferral-only arrangement: The legislation also establishes a new type of 401(k) plan—a “deferral-only arrangement”—that is treated as satisfying the ADP test. A deferral-only arrangement is a cash or deferred arrangement that meets certain requirements relating to automatic enrollment, elective contributions, and employee notices.
Under the arrangement, the only contributions that may be permitted are elective contributions of employees eligible to participate; thus, the employer may not make matching or nonelective contributions to the plan. In addition, the aggregate amount of any employee’s elective contributions for a calendar year may not exceed the contribution limit that is generally applicable to individual retirement arrangements ($6,000 for 2021). Catch-up contributions would be permitted up to $1,000, indexed for inflation.
The proposal would be effective for plan years beginning after Dec. 31, 2022.
Increase in credit limitation for small employer pension plan startup costs: The proposal modifies the nonrefundable income tax credit for qualified startup costs of an eligible small employer that adopts an eligible employer plan (i.e, a qualified retirement plan, SIMPLE IRA plan, or SEP).
The nonrefundable income tax credit would be available for qualified startup costs of an eligible small employer for up to five years beginning with the year the plan is first effective, or, at the election of the employer, with the year preceding the first plan year. For an eligible employer with 25 or fewer employees with compensation of $5,000 or more, the credit is available for 100% of qualified startup costs.
The credit would not be available for the startup costs with respect to deferral-only arrangements as described in the bill. Additionally, since an automatic IRA arrangement is not an eligible employer plan, the credit also would not be available for these arrangements. For taxable years beginning after Dec. 31, 2022, no credit would be allowed for amounts paid or incurred with respect to an eligible employer plan that is not an automatic contribution plan as defined in the bill.
The proposal is effective for tax years beginning after Dec. 31, 2021.
Credit for certain small employer ARAs: A nonrefundable income tax credit equal to a flat dollar amount of $500 would be available to eligible employers who participate in an eligible automatic IRA arrangement, including an arrangement under a qualified state law or a deferral-only arrangement.
The credit would be available during the first four years in which the eligible employer participates in a qualified arrangement. An eligible employer is defined as an employer that had no more than 100 employees with compensation of $5,000 or more, and did not maintain a qualified employer plan during the portion of the calendar year preceding the adoption of the automatic IRA arrangement or deferral-only arrangement and the two preceding calendar years.
The proposal is effective for taxable years beginning after Dec. 31, 2021.
Saver’s Credit expansion: The proposal would also make the Saver’s Credit refundable so that those without any income tax liability are eligible to receive the benefit in the form of a contribution to their retirement account.
Under the proposal, an eligible individual will be allowed a refundable income tax credit, up to $500 (adjusted for inflation), equal to a percentage of qualified retirement savings contributions made by the individual to his or her retirement account. The credit will be paid by the Treasury Secretary as a contribution to the eligible individual’s applicable retirement savings vehicle, which would be made as soon as practicable after the individual files a tax return making a claim for the credit. The amendments made by this proposal would apply to tax years beginning after Dec. 31, 2024.
“Later this week, the Ways and Means Committee will put an end to the idea that only some workers are worthy of ‘perks’ like paid leave, child care, and assistance in saving for retirement, and finally commit to investments that make these supports fixtures of the American workplace,” Neal said in a statement. “This is our historic opportunity to support working families and ensure our economy is stronger, more inclusive, and more resilient for generations to come.”
