Subscribe (Free) to
Daily or Weekly Newsletters
Post a Job

Featured Jobs

Business Development Director

AimPoint Pension
(Remote / Pompano Beach FL / AL / GA)

AimPoint Pension logo

Loan & Distribution Specialist

AimPoint Pension
(Remote)

AimPoint Pension logo

Retirement Plan Administrator

Bates & Company, Inc.
(Remote / Winter Park FL)

Bates & Company, Inc. logo

Director of 3(16) Operations

Compass
(Remote / NH / Hybrid)

Compass logo

Regional Vice President of Sales

The Retirement Plan Company
(Remote / AL / FL / GA / MS)

The Retirement Plan Company logo

Defined Benefit Combo Cash Balance Compliance Consultant

Loren D. Stark Company (LDSCO)
(Remote)

Loren D.  Stark Company (LDSCO) logo

View More Employee Benefits Jobs

Free Newsletters

“BenefitsLink continues to be the most valuable resource we have at the firm.”

-- An attorney subscriber

Mobile app icon
LinkedIn icon     Twitter icon     Facebook icon

Guest Article

The Payroll IRA Plan of S. 1141 and H.R. 2167: It's PIP – Or Is It?

By Alvin D. Lurie
July 15, 2008


An idea that has been wafting about in legislative halls and hearing rooms, in print and electronic media, and in assorted other venues for several years is to make employers in small businesses set up a payroll deduction facility for their employees not covered by employer-sponsored retirement plans, for the purpose of easing the making of contributions to an IRA established by or on behalf of the employee. The thought behind it is that this will expand retirement saving in workplaces where it has not taken place, by moving a piece of the employee's paycheck directly into an IRA seamlessly without the employee's lifting a finger. The premise is that this would overcome inertial and other forces on the employee's side, and at the same time obviate to the greatest extent possible any involvement by the employer that would otherwise be associated with instituting its own plan, that is, the management chores and time of learning and complying with regulations, filing forms, diverting personnel from business operations, incurring payroll costs, and absorbing the many other burdens and expenses inherent in maintaining a retirement plan if it were treated for tax purposes as an "employer plan"...

The scheme is well-intentioned. If this causes one to call to mind the saying that the road to hell is paved with good intentions, I cannot be responsible for what comes to one's mind. It is not, however, my purpose to debunk the scheme, so much as to give the reader pause long enough to reflect on whether this is such a pip of an idea. (Note: The "PIP" of my title is an acronymic designation that I have coined for what can be called a Payroll IRA Plan; but the reader must decide whether it also connotes a dictionary meaning of the term.)

The PIP is more than just an idea. It has been embodied in several federal legislative proposals, and some states have also flirted with the concept, with the view to leveraging the power, and prestige and facilities of the state to effectuate the program for workers within its borders who would otherwise lack the means to acquire access to a personal retirement program. Two companion bills were introduced in the U.S. Congress in 2007, S. 1141 and H.R. 2167, each called The Automatic IRA Act, which would mandate that certain employers establish payroll credit programs by which employees can make deductible contributions to IRAs if they have not been covered in any of the several federally authorized traditional or Roth IRAs, as well as so-called SEPs and SIMPLEs (not really simple, the all-capitalized name actually standing for Savings Incentive Match Plan), or in qualified defined benefit and defined contribution pension plans. A variant of the bills mentioned above is H.R. 5543, that also provides for a payroll IRA arrangement, but, unlike the Automatic IRA Act, authorizes employers to establish such a payroll deduction program but does not mandate it.

One can hope that if the Automatic IRA gets into law, it will be as an optional program for employers. Of course, employees will have the option to participate or not, although the above legislation will make participation by each employee automatic unless the employee affirmatively options out. H.R. 2167 was one of the main topics discussed at a recent hearing on IRAs by the Ways & Means Committee's subcommittee on Select Revenue Measures, which has moved the legislation into the spotlight. One of the chief witnesses at the hearing was the Treasury Department, which testified in the person of its Benefits Tax Counsel, who expressed reservations about mandating the program for employers. After noting the promotion of employer-sponsored retirement savings programs by the Treasury and IRS and their receptivity to new ideas to make plan sponsorship easier, the Treasury official stated they were "concerned about imposing mandatory requirements that could affect the ability of an employer, particularly a small employer, to run the business efficiently and compete effectively in the marketplace."

Warming to his subject, the official observed: "Operating a business already involves a significant amount of investment (typically the employer's time and money) and adding yet another stringent requirement could have an adverse effect, particularly on small employers, which are an essential sector of America's economy." Two other legislative initiatives come to mind when government was not so receptive to unburdening business of mandatory employee benefits responsibilities. One occurred in the mid-Fifties, when the Cabinet Committee (so called because consisting mainly of members of the Eisenhower Cabinet) was charged with developing a blueprint for pension reform, and proposed, as a key recommendation, instituting a Mandatory Universal Pension System (irreverently called MUPS by its opponents). The Cabinet Committee recommendations foreshadowed ERISA to a considerable extent; but MUPS did not make it into that law.

Not so lucky was the business community 15 years later, when Congress enacted Section 89 of the Internal Revenue Code to mandate a leveling of benefits across the full spectrum of an employer's payroll for group term life and accident-and-health benefits, and, electively, for dependent care, group legal services and educational assistance plans. That evoked a mighty howl from the business community that was not to be denied, and a year later the section was unenacted. Should the PIP proposal be passed by the next Congress, with support from the Oval Office (if its occupant happens to be of the same party that seems likely to control the legislative Houses and who has signaled that he favors the pending bills), quick reversal a la the section 89 experience cannot be anticipated. It is only small business that would suffer from the legislation; and while many in Congress pay lip service to that "essential sector of America's economy", without the muscle of Big Business the lip service is as far as it will probably go.

Thus, the better time to state one's objections to the PIP proposal is before enactment. Treasury's Benefits Tax Counsel, Tom Reeder, in his thoughtful testimony, posed other potent considerations at the recent hearing. For one thing, he noted that "mandating a particular benefit on small employers, particularly to the extent such benefits (sic) imposes a significant cost on the employer, could affect the employer's decision to offer other employee benefits that may be more relevant for the employer's workforce, particularly health coverage."

Then, painting on a larger canvas, he said: "...we should not lose sight of the fact that IRAs generally are not as powerful a retirement savings tool as other tax-qualified retirement plans, such as 401(k), 403(b) and other defined contribution plans and defined benefit plans. This is primarily because the restriction on pre-retirement distributions in such plans avoids much of the pre-retirement leakage that occurs in IRAs. We should not encourage employers to adopt IRA programs if they are instead willing and able to adopt these more sophisticated and flexible retirement plans to benefit their employees." I could not agree more. IRAs are not the response to all savings objectives. Some will find this hard to believe, but there was a time when IRAs did not even exist. They only came on the scene with the passage of ERISA, and it took several years after that before they slowly began to gain acceptance.

There was even a time when the use of the tax law to cure the nation's economic ills or goals was in ill repute, and each resort to that tactic was suspect. That was when one could easily hold the Internal Revenue Regulations, let alone the Code, in one hand, That was before the IRA became the vehicle of choice for many Congressmen to woo their constituents. Indeed, its very name, Individual Retirement Account, has become an anachronism, with IRAs for health, and IRAs for college, and IRAs for hardship and IRAs to pay for one's first house now acceptable. It will not be long before a bill is introduced to authorize IRAs to pay for a tank of gas.

Besides those special-purpose IRAs there are rollover IRAs, and conduit IRAs, and the Roth IRA (some with a stapled 401(K) feature), and even deemed IRAs operating inside an employer retirement plan. Then there are the employer-initiated SEPs, and now vanishing SAR-SEPS, and the deceptively named SIMPLEs.

The fact is none of this is simple. Today even many (would you believe most?) competent benefit specialists would be hard pressed to explain, even on an open-book exam paper, the differences among this congeries of IRA-based benefit arrangements. Besides, many of these devices are meant for small businesses and for very unhighly compensated employees, for whom highly skilled and costly benefit advisers are not an option. The Benefits Tax Counsel had something cogent to say about this too at the hearing:

"Because the Administration has been concerned about the hurdles employers face in trying to establish savings plans for their employees, the Administration's Budget has included for the past several years a proposal (the "Employer Retirement Savings Account" or ERSA) to combine the various types of employer-sponsored savings plans into a single type of plan (with simplified administrative rules for small employers). Of course the Administration would be open to other proposals that decrease the complexity of administrative burden on small employers that want to provide savings opportunities for their employees."

The present-day array of options is itself a major ingredient of the complexity. The pending payroll IRA proposals would only further exacerbate the problem. One cannot add more layers to this over-elegant benefits structure, that, like Topsy, has "jest growed", without first examining the foundation. Besides, are more IRAs the way to go? Do we really want to continue down this road of thrusting more and more responsibility for planning for retirement, and longevity, and investment, and risk generally on the segment of the workforce least able to cope with those fine arts, while imposing the associated costs of maintaining such arrangements on small businesses, many of which obviously can't bear such expenses, as evidenced by their having failed to adopt traditional qualified arrangements, even 401(k) plans that often spare the employer from contributing to the benefits? Might it not be better for employees if their employers were incented to return to the DB plan design, e.g., by being given freedom from the crushing regulatory burden that adoption of a DB plan entails?

Professor Zelinsky, in his recent remarkable little book, "The Origins of the Ownership Society" (subtitled "How the Defined Contribution Paradigm Changed America") – little in length, large in scholarship and wisdom -- documents how the shift from a DB-dominant benefits scene to an ever- accelerating DC-dominant society came about. He points out (as loosely paraphrased by me), this was not the product of some grand design. It was rather the consequence of progressive accretions, each making the way for the next, so opening the door to ever more variations of DCs, while at the same time making it increasingly burdensome to stay on the DB course. Consider the Pension Protection Act for the latest and most burdensome example of that very thing.

The pending Automatic IRA Acts are another step down that road. Not that I think the recent hearing on the House's H.R. 2167 version means enactment is around the corner. That bill is going nowhere until the next Congress at the earliest. The collective mind of the House and a large part of the Senate will have little to think about until November besides getting elected and maybe rescuing the economy. With businesses of all sizes running hard just to survive, not least small businesses, it is doubtful Congress or the next Administration will have much appetite in the 111th Session of Congress for laws that make that survival more uncertain. But that doesn't mean it is too soon to be thinking about where the Nation's retirement security is heading. That issue will be with us still when concern about the price posted on the gas pump will have faded from memory.

Copyright 2008 A. D. Lurie


Alvin D. Lurie is a practicing pension attorney. He was appointed as the first person to administer the IRS' ERISA program in the National office in Washington. He can be contacted at Alvin D. Lurie, P.C. in Larchmont, New York, at (914) 834-6725 or via email: allurie@verizon.net.
BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.
© 2024 BenefitsLink.com, Inc.