Tax Law Updates | New Proposed Legislation
September 29, 2011
Automatic IRA Act of 2011 Focuses on Addressing Retirement Savings Crisis
Automatic IRA Act of 2011
S. 1557, 9/14/2011
The Automatic IRA Act of 2011 seeks to address the nation’s retirement savings crisis. When fully phased in, the bill will give nearly 42 million Americans an easy, effective way to take responsibility for their fiscal futures and plan for a secure retirement.
U.S. Senators Jeff Bingaman and John Kerry are the sponsors of the bill.
The Automatic IRA Act of 2011 (S. 1557) enables nearly all employees who work for a private business with more than 10 workers and whose employer does not already offer a retirement plan to contribute to retirement savings through payroll deductions. Worker contributions would be deposited into their own Individual Retirement Account (IRA) ultimately managed by the same banks, mutual funds, insurance carriers, and other institutions that currently provide IRAs. The approach builds on the use of automatic features in 401(k) plans that encourage employees toward sensible decisions (while allowing them to make alternative choices), which has proven highly successful in raising 401(k) contribution rates.
Employers will receive a tax credit to cover the administrative costs of setting up the IRA account, but they will not be allowed to make a contribution to it.
According to a 2009 Boston College Center for Retirement Research report, nearly 50 percent of American households will retire without enough savings to maintain their pre-retirement standard of living. A significant driver of America’s inadequate retirement savings is a crisis of coverage. About half of all American workers now have no opportunity to save for retirement at work; in New Mexico that percentage reaches nearly 60 percent.
The Obama administration has called on Congress to enact an automatic IRA measure, and included a proposal in its FY 2011 budget.
The concept of automatic IRAs was first developed several years ago by scholars at the Heritage Foundation and Brookings Institution. The idea enjoys the support of experts such as Martin Feldstein and Jane Bryant Quinn.
The automatic IRA concept has also been supported by a broad range of organizations, including AARP, Consumers Union, the Minority Business Roundtable, and the U.S. Women’s Chamber of Commerce.
Bingaman and Kerry are members of the Senate Finance Committee, where this bill has been referred.
The Office of Sen. Bingaman explained the features of the bill, shown as follows:
Covered employers and employees:
1. Size. In the first year after enactment, the provision will apply only to firms with 100 or more employees (counting employees who earned more than $5,000 in the prior year); in the second year, 50 or more; in the third, 25 or more; and in the fourth, 10 or more. (Any employer of any size can opt in at any time.) This phase-in will enable retirement service providers to prepare for a significant expansion in the number of IRA accounts (through product innovation and marketing) and regulators to address enforcement and other regulatory issues.
2. Employers with qualified retirement plans generally exempted. An employer that already maintains a qualified retirement plan is generally not required to offer an automatic IRA. However, if such an employer generally does not cover employees in a division, subsidiary or other major business unit, the employer would have to provide an automatic IRA to those employees.
3. Other exemptions. The provision will not apply to employers that have not been in existence for two full years. Nor will it apply to governmental or church employers.
4. Tax credit. To offset administrative costs, employers will receive a $250 tax credit for each of the first two years of Auto IRA operation. An Optimal Benefit Services study finds this amount will almost always cover costs for employers.
The report finds: “Most small employers will have only small incremental costs to modify their payroll processing systems in order to facilitate enrollment in Automatic IRAs and withholding of Automatic IRA contributions. The widespread adoption of automated payroll systems, including within the small business sector, and the ability of those system providers to build the Automatic IRA into their services, will make this new employee benefit relatively simple to implement.”
5. Covered employees. Employees who have been employed for at least 3 months and employees who have attained age 18 as of the beginning of the year are automatically enrolled in an Automatic IRA, but can affirmatively opt out.
6. Penalty for employer failure to offer auto IRA. An employer that fails to offer an automatic IRA for its employees is subject to an excise tax of $100 for each employee who was supposed to be covered. Employers who make an innocent error will have the opportunity to self-correct.
1. Amount. Employers will contribute a default percentage of an employee’s paycheck into the employee’s Automatic IRA account. The bill sets the default at 3% (or such other percentage prescribed in regulations). Employees can raise or lower their contribution percentage, or can opt-out entirely from the program.
2. Savers’ credit. Contributions to Automatic IRA accounts
3. Choice of IRA type. Employees will have the choice of contributing to either a traditional IRA or a Roth IRA. If no choice is made, automatic IRA accounts will be established, by default, as Roth IRA accounts. Contributions to Roth IRAs are not tax deductible, but inside buildup and qualified distributions are tax-free. These features make Roth IRAs particularly well-suited for the many lower- and moderate-income workers who will have Automatic IRAs. Additionally, Roth IRAs address the problem of a worker needing to access their savings for emergency purposes, since (unlike in the case of non-Roth IRAs) pre-retirement withdrawals of a worker’s contributions are not subject to tax or penalty.
1. Voluntary provider participation. No investment firm (“provider”) will be required to accept (“trustee”) Automatic IRA accounts.
2. Employer selection. An employer can select an IRA provider to which all Automatic IRA contributions from their employees will be sent. A central online website developed by Treasury (possibly by contracting out) will list providers that meet regulatory requirements to offer Automatic IRA services and to safely hold accounts.
3. Optional Employee choice. The employer may also allow each individual employee to send contributions to an IRA provider selected by the employee.
4. Default assignment of automatic IRA provider. An employer that does not want to select a specific IRA provider can specify that employee accounts be maintained by a provider selected for that employer from a group of default private-sector providers.
5. Fees. The Department of Labor (DOL), in consultation with the Department of the Treasury (Treasury) and the Securities and Exchange Commission, will be required to promulgate clear and unifor methods for reporting fees. A provider that chooses to offer Automatic IRAs will not be permitted to assess fees based solely on low account balances.
1. Limited responsibilities for investment. Employers will have no ERISA fiduciary liability if they use a provider that is on a list of approved providers or uses R-Bonds.
2. Timely remittance. The employer must transmit employee contributions by the end of the month following the month in which the cash would have been paid had it not been contributed to the Automatic IRA. An excise tax will apply if the employer fails to remit on time.
3. No self-dealing. Employers will be subject to self-dealing prohibitions.
4. Disclosure. An employer’s sole disclosure responsibility will be to provide the employee with a standardized form explaining the program and investment decisions. This form will be either attached to the IRS Form W-4 or available from a central website or through IRA providers.
1. Study on consolidating IRA accounts. The bill directs Treasury and DOL to conduct a study of the desirability and practicality of using data on IRA investments to enable individuals with multiple IRA accounts that include small accounts to receive periodic notices informing them about the location of these accounts and how they might be consolidated. The study will also consider using investment arrangements associated with automatic IRAs to assist in addressing the problem of abandoned accounts.
2. Additional studies. The bill mandates that Treasury/DOL study and report to Congress on spousal consent, and potential lifetime income options, for Automatic IRAs.
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