Legislation that would require U.S. companies without retirement plans to automatically enroll workers in individual retirement accounts narrowly passed the House Ways and Means Committee on Thursday.
Democrats on the committee managed to advance the retirement section of their $3.5 trillion healthcare, education and climate bill by a vote of 22-20, led by committee chairman Richard Neal (D-MA), who has supported the automatic IRA idea for years.
A pair of Democrats on the committee—Reps. Stephanie Murphy (Fla.) and Ron Kind (Wis.)—joined Republican committee members in voting against the section.
My constituents expect me to consider bills in a thorough & transparent way. While I support many provisions in the Build Back Better Act, it’s being rushed through my committee before we know exactly what’s in it, what it’s going to cost, & how we’re going to pay for it.
— U.S. Rep. Stephanie Murphy (@RepStephMurphy) September 9, 2021
The House Ways and Means Committee began formally drafting its portion of the 10-year measure intended to combat climate change and reweave the nation’s social safety net, with other components including paid family and medical leave, expanded public education, new Medicare benefits and more.
In addition to the automatic enrollment in retirement plans provision, the retirement section that passed committee Thursday also includes an enhancement of a retirement savings tax credit (the Saver’s Credit) that benefits low- and middle-income households.
The Hill reported that Republicans had offered several amendments to the retirement portion, but they were rejected by Democrats.
In arguing for the retirement provisions, Chairman Neal said in a statement to the committee Thursday that the country faces a retirement income crisis, with nearly one-third of Americans having no retirement savings at all and about half of working-age households at risk for being unable to maintain their current standard of living after retiring.
“We know that having an employer-sponsored retirement plan is key to preparing for retirement, but nearly half of American private sector employees work for an employer that doesn’t offer a retirement plan,” Neal said.
Wayne Chopus, President and CEO of the Insured Retirement Institute, applauded Neal and the committee for advancing the provisions. “We appreciate Chairman Neal’s steadfast leadership and advocacy of this legislation to help America’s workers, retirees, and their families build economic equity, strengthen financial security, and protect income in a sustainable manner to last throughout retirement years,” Chopus said in a Sept. 9 statement. “We look forward to working with Chairman Neal and other supporters to enact this important initiative.”
Auto IRA provision
Specifically, the automatic IRA proposal would require employers that have been in existence for at least two years, do not sponsor a retirement plan, and employ five or more people to automatically enroll those employees in IRAs or 401k-type plans. To offset administrative costs, employers would receive a tax credit.
Starting on Jan. 1, 2023, the provision would require employers to deduct at least 6% from employee paychecks and automatically increase that savings rate by 1% per year until reaching 10%. Employees would be free to opt out or change their savings rate.
Companies with five or fewer employees and those which have been in business for less than two years would be exempt from the requirement. The mandate wouldn’t cover employees under 21 and would require employers to automatically enroll part-time employees working more than 500 hours a year for at least two consecutive years.
Companies that fail to comply would be fined $10 per employee per day for up to three months.
“The automatic IRA/plan legislation will transform the retirement savings future for millions of Americans by giving them the opportunity for the first time to save for retirement at work. The proposal strikes the right balance by giving virtually all Americans the ability to save for retirement at work, without burdening the small businesses that are the backbone of our economy,” State Street Global Advisors Managing Director of Retirement Policy Melissa Kahn told 401k Specialist. “For example, no business would be required to make a contribution to the plan and there would be tax credits that would cover the entire cost of the plan during its first five years.”
The bill also breaks down administrative barriers that could be a burden for small businesses, Khan added. “Combining these reforms with the pooled employer plan opportunities of the SECURE Act, the bill helps small businesses offer sound retirement plans, while also enriching the lives of millions of employees.”
Too much for small biz?
Some small business groups say the requirement is indeed too much to ask of small employers—and so does the top Republican on the committee, Rep. Kevin Brady (R-Texas).
He said the auto-IRA provision would impose an “onerous new mandate” for businesses, and criticized Democrats for taking a partisan approach to retirement-savings legislation, since lawmakers on the committee have previously worked on bipartisan bills on the topic.
“Proclaiming ‘If this is socialist, count me in,’ Ways and Means Democrats began their rush to ram through trillions of dollars in new welfare spending and tax hikes with two new massive entitlement programs that include crushing Washington mandates on small businesses,” Brady said in a statement Thursday night.
“On Day One alone, they approved $650 billion in government spending that will trigger higher prices and job-killing tax hikes, and included huge subsidies for the wealthy and big business,” he said, before adding, “They also vigorously rejected bipartisan retirement reform.”
Michael Kreps, principal and co-chair, retirement services practice at Groom Law Group, told The Wall Street Journal that the IRA provision is “a big deal.” If it passes, “It’s going to move us farther towards universal coverage than a bill ever has.”
The Saver’s Credit
The retirement provision of the massive spending bill also calls for expanding the use of the Saver’s Credit in an effort to help low- and middle-income households. Current law includes this nonrefundable tax credit for eligible taxpayers who make contributions to retirement plans or IRAs.
“The investments we’re considering would make the Saver’s Credit refundable, so that those without any income tax liability receive a benefit,” Neal said in his statement. “The proposal also would require the credit amount to be contributed directly to a tax-favored retirement account, in effect, acting as a matching contribution for savers.”
Currently people eligible for the Saver’s Credit can claim up to $1,000 as a reduction in their federal income-tax liability. But those in the lowest tax brackets often owe little to no income tax, rendering them unable to take full advantage of the credit.
Under the provision, savers would qualify for the credit even if they had no federal income-tax liability. The government would deposit a smaller saver’s credit, of up to $500, into the retirement accounts of those who qualify. The credit is calculated as a percentage of the taxpayer’s retirement savings contributions and varies by income.
Under current law, a couple earning $39,500 or less can receive a tax credit of 50% of the amount, up to $2,000, saved in retirement accounts. The credit then phases out, ending completely at income of $66,000 per couple or $33,000 per individual.
The big picture
The WSJ reports the cost of the retirement provisions is projected at $46.8 billion over the first decade, according to the nonpartisan congressional Joint Committee on Taxation. If enacted, the measure would reduce a retirement coverage gap that affects some 33% of private-sector workers, according to the U.S. Bureau of Labor Statistics.
In his remarks, Neal emphasized that the automatic IRAs and Saver’s Credit enhancements would dramatically expand retirement savings in the United States.
“According to recent analysis commissioned by the American Retirement Association, implementing these proposals could add up to $7.0 trillion in additional retirement savings over a 10-year period—and create more than 62 million new retirement savers,” Neal said.
He also noted these investments would help address inequities in retirement saving. “Automatic IRAs would particularly benefit Hispanic, Asian, and Black populations in the United States, as they are less likely to have access to work-sponsored retirement plans,” Neal said. “It’s estimated that the Auto IRA and Saver’s Credit enhancements would result in 7.0 million new Black savers and 10.8 million new Latino and Latina savers. Over 98% of new savers make less than $100,000 per year.”
The Ways and Means Committee is one of several House panels that are considering portions of the $3.5 trillion social-spending package this week. House Democrats are aiming for all committees to finish their markups by Sept. 15.
Neal told reporters after the markup ended Thursday evening that he expects to release legislative text about how to offset the new spending over the weekend, adding that he doesn’t expect the tax portion to raise a full $3.5 trillion in revenue.
The “pay-fors” are expected to include a sharpened focus on IRS tax collections in the next 10 years in an effort close the net on wealthy tax evaders who fail to pay as much as $163 billion in owed taxes per year, according to a new Treasury Department analysis.
Other key revenue-generating measures that could be included to help pay for the massive spending include returning the top individual income tax rate to 39.6% from the 37% top rate that President Donald Trump’s tax cuts created in 2017; raising the corporate income tax rate from the 21% in the Trump tax cuts to perhaps 25%; closing loopholes on mega-IRAs; and possibly taxing the accumulated wealth of billionaires.
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