All eyes are on Congress as it wrestles with a $1 trillion infrastructure bill and a $3.5 trillion budget reconciliation bill. The House Ways and Means Committee markup of the reconciliation bill would require certain employers with five or more employees to automatically enroll employees in a payroll deduction IRA. This requirement would take effect on January 1, 2023.
The proposal could help reduce poverty in old age. While more than 90% of employers with 100 or more employees offer a retirement plan, fewer than half of those with under 100 employees do. And one-third of all workers retire with no retirement savings. The proposal could also help sustain the economy, as retirees generally spend their distributions on necessities purchased locally.
Under current law, an employer may provide a 401(k), an annuity plan, a SEP, or a SIMPLE IRA, among other options. Under the proposal, existing plans would not be subject to the new requirements, and an employer that currently offers no plan would be required to offer an IRA as the default choice.
An employee who is at least 21 years old and has at least one year of service or has worked at least 500 hours in two consecutive 12-month periods would be automatically enrolled for payroll deductions of up to 6% of pay. That percentage would increase by one percentage point per year until it reaches 10%.
The IRA limit, currently $6000, or $7000 if the employee is over age 50, would apply. After-tax Roth IRAs are expected to be the default choice.
An employee could choose to contribute a lower percentage or opt-out entirely. But the auto-enrollment and auto-escalation features would harness behavioral economics, to “nudge” employees to save for retirement. One study shows that employees are more than ten times more likely to save if they must opt out rather than opt in.
As an added incentive, the proposal would subsidize retirement savings through a refundable Savers Credit at tax time. With the credit, the federal government would pay a fifty-percent matching contribution to the IRA of up to $1,000 and no less than $100.
Proponents estimate that the proposal would add 62 million retirement savers and an unprecedented $7 trillion in retirement savings over ten years.
Under the Ways and Means proposal, the employer could select the IRA provider or could allow each employee to make a selection. Investment offerings would need to include a target-date fund, a balanced fund, and a capital-preservation fund, and others that the Treasury Department may prescribe.
If an employee’s account balance exceeds $200,000, a lifetime income option would need to be offered for half the balance. This feature would be exempt from the Internal Revenue Code’s rules against discrimination in favor of the highly compensated.
Though no employer match would be required, employers are justifiably concerned about costs. Small employers lack economies of scale, so start-up and ongoing costs of even a payroll- deduction IRA arrangement can be disproportionately high. To ameliorate this concern, an employer would get a $500 tax credit for setting up such an arrangement.
An employer could obtain Treasury Department certification of its arrangement. An employer that fails to set up a qualifying arrangement would be subject to a penalty of $10 per day per employee for up to three months. The penalty for unintentional failures would be capped at $500,000. The Treasury Department would publish information to assist employers in obtaining certification.
State retirement savings platforms with an auto-enrollment feature, such as CalSavers and similar programs in Connecticut, Illinois, Maryland, and Oregon, would be treated as qualifying plans. (In July, the Ninth Circuit upheld CalSavers on the grounds that it is not an ERISA “plan” and therefore is not preempted by ERISA.)
The proposal would create opportunities and challenges for investment managers, third-party administrators, and others who serve employee benefit plans.
Questions, questions …
The proposal also raises a number of technical questions under ERISA and the Internal Revenue Code. For example:
- How would small employers effectively carry out their obligations to prudently select and monitor service providers? For example, should there be a safe harbor for use of providers on a Treasury Department-approved list?
- How would the proposal’s requirement that employers auto-enroll employees who have worked at least 500 hours in two consecutive 12-month periods square with the Internal Revenue Code’s existing requirement that 401(k) plans allow part-time employees who have worked at least 500 hours in three consecutive 12-month periods to make salary deferral contributions?
- Would every new 401(k) plan need to include auto-enrollment and auto-escalation provisions? Will this discourage employers from adopting 401(k) plans due to the added complexity and potential for errors?
Of course, it is too early to predict passage. The reconciliation bill requires only 50 votes in the Senate, and at this writing, Democrats are divided on how much to spend and what to spend it on. The budget estimate for the Ways and Means proposal is $47 billion.
The SECURE Act 2.0 also has an auto-enrollment provision, though it would not be mandatory for employers. SECURE 2.0 would also allow employer matching contributions to defray employees’ payment of student debt. Congressman Richard Neal, Chairman of Ways and Means, has said that he also expects SECURE 2.0 to pass.
Beyond that, auto-enrollment IRA proposals raise fundamental questions about the future of retirement savings. When employees become retirement savers, will they eventually demand 401(k)s, employer matching contributions, or variable benefit, cash balance, or even traditional defined benefit plans? Or will auto-IRAs crowd out other models?
Economic inequality is a defining issue. The retirement savings gap is an important aspect of that issue. Initiatives to broaden retirement coverage can only help sustain support for our current system. Therefore, it is important to watch what Congress does in the retirement space.
Since 1996, The Wagner Law Group has provided a practical approach and sophisticated legal solutions while offering the personalized attention of a boutique law firm. Our practice areas include ERISA Law, Investment Management Law, Employment Law, Labor, and Human Resources, Employee Benefits, Welfare Benefits, Privacy & Security, Corporate Law, Tax, Estate Planning and Administration, Real Estate and Litigation. Marcia Wagner can be reached at marcia@wagnerlawgroup.com.
Israel Goldowitz is uniquely qualified to advise on single- and multiemployer defined benefit pension plans in mergers and acquisitions, restructuring, and bankruptcy. Israel has more than 40 years of experience in these areas, including 30 years with the Pension Benefit Guaranty Corporation (PBGC) and ten years as PBGC’s Chief Counsel.
Israel has helped establish several key precedents in the U.S. Supreme Court and Courts of Appeals. Among them are decisions upholding mandatory arbitration of withdrawal liability claims, defining the rules for terminating single-employer plans and distributing their assets, and confirming the application of ERISA in pension disputes in bankruptcy. He has extensive experience in federal courts at all levels, including amicus briefs in the Supreme Court and the Courts of Appeals. He often provides expert guidance to litigation counsel and has rendered several expert opinions on pension issues.
Israel began his career with the United Mine Workers of America Health & Retirement Funds, a pioneering group of multiemployer plans. He was the lead PBGC attorney on multiemployer transactions, rulings, and advice for many years, and later oversaw that work as PBGC's Deputy General Counsel for Program Law and Policy. That included the development of regulations and other guidance for the PBGC single-employer and multiemployer insurance programs and advising Congress on legislative proposals affecting those programs, including rescue of the multiemployer system.
Israel is well known in the ERISA and bankruptcy communities and to leaders in government, business, labor, and academia. He is a frequent speaker and has written book chapters, articles, and continuing legal education materials on both employee benefits and bankruptcy topics.
Israel served as a member of the Board of Governors of the American College of Employee Benefits Counsel and is active in the International Pension and Employee Benefits Lawyers Association. He served on the Labor and Benefits Advisory Committee to the American Bankruptcy Institute's Chapter 11 Reform Commission and co-wrote the report of the pension subcommittee. He taught Employee Benefits for more than 20 years in the Georgetown University Law Center Masters of Law program and is a frequent guest lecturer at New York-area law schools.
Jon Schultze joined the Wagner Law Group in 2003 and has served as a partner since 2007, specializing primarily in the areas of Employee Benefits and ERISA. Jon advises and represents privately held, publicly traded and tax-exempt clients of all sizes regarding statutory, regulatory, fiduciary, administrative, and operational issues arising out of qualified and non-qualified employee benefit plans and programs and executive compensation agreements.
At The Wagner Law Group, Jon oversees the firm's qualified retirement plan area, which includes ensuring that our clients' retirement plans conform to legal requirements by reviewing existing plans for statutory, regulatory, and fiduciary compliance, as well as drafting and maintaining the firm's pre approved retirement plan documents. Jon also has extensive experience evaluating the feasibility of various qualified plan designs and revising such designs, representing clients in Internal Revenue Service, Department of Labor, and Pension Benefit Guaranty Corporation audits, performing due diligence reviews of employee benefit plans and programs in company mergers and acquisitions and establishing and maintaining employee stock ownership plans (ESOPs) and representing ESOP-owned companies in mergers and acquisitions.
Jon also is responsible for researching complicated employee benefit issues, such as controlled group determinations, plan correction methodologies and plan compliance requirements that constantly change. He routinely analyzes legal and operational plan failures and achieves favorable resolutions through negotiations with the Internal Revenue Service, the Department of Labor, and the Pension Benefit Guaranty Corporation under their respective correction programs, including distress terminations of defined benefit pension plans.
Mark Greenstein is a seasoned ERISA attorney who came to The Wagner Law Group after nearly 25 years in the Office of Policy and Research at the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA). During his tenure at the DOL, Mark analyzed complex legal issues arising under Title I of ERISA, including those arising under legislation, as well under Organization for Economic Co-operation and Development (OECD) and Government Accountability Office (GAO) reports. In the private sector, Mark represented corporate clients on ERISA Title I issues , including in connection with an application for a landmark ERISA prohibited transaction exemption.
Mark also served in EBSA’s Office of Regulations and Interpretations, Division of Fiduciary Interpretations, where he responded to inquiries from the public and the field on ERISA Title I issues, including fiduciary responsibility and prohibited transaction provisions. As Acting Division Chief there, Mark supervised the production of a large volume of advisory opinions and other guidance. He also originated the analysis that served as the basis for the Supreme Court’s decision in the seminal Title I case, Commissioner v. Keystone Consol. Industries, Inc. In addition, Mark originated drafts and analyses serving as the basis for the DOL regulations under Section 404(c) of ERISA.