Bills to Require Automatic Employer-Provided IRAs Proposed in House and Senate

• Employers Covered: Employers with 100 or more employees who do not maintain a qualified retirement plan would be required to automatically enroll their employees in individual retirement accounts ("Automatic IRAs"). Certain employers would be exempt from coverage (i.e., governmental and church employers, and employers that have been in existence for less than two years). An annual $250 employer tax credit would be provided for the first two years an employer provides the Automatic IRAs. Employers who fail to comply would face an excise tax of $100 for each employee who was supposed to be covered.
• Employees Covered: Automatic IRAs would have to be established for all employees who are employed for at least 3 months and are at least 18 years old as of the beginning of the year.
• Contributions: Contributions would be made from the employee's compensation, in an amount equal to 3 percent of compensation unless the employee elects to raise, lower or opt-out of the contributions. The contributions could qualify for the savers tax credit. The existing IRA contribution limit would apply (i.e., currently $5,000 per year, with an additional $1,000 for individuals age 50 or older). No employer contributions would be allowed.
• Traditional or Roth IRA: An employee would be able to elect for either a traditional or a Roth IRA to serve as the Automatic IRA. In the absence of an election, the Senate bill would establish the default as a Roth IRA while the House bill would establish the default as a traditional IRA. Both bills call for the Automatic IRAs to be portable, without regard to employment status, so they could be rolled into and out of other IRAs and qualified plans.
• Trustees: The employer would be able to select an IRA provider for all of its Automatic IRA contributions, or allow the employees to select their own individual provider. The Senate bill provides for the establishment of default private-sector providers for employers who do not select a specific provider. The House bill provides a default procedure by which the Treasury department would establish a retirement bond ("R-bond") and non-electing employers would forward their contributions to the Treasury department (along with payroll tax deposits) for investment in the R-bond.
• Investments: Automatic IRAs would offer the same three standardized investments: a principal preservation fund, a target date or lifecycle fund, and a third option. The Senate bill calls for the third option to be a fund with a higher concentration of equities than the lifecycle or target funds, while the House bill calls for the third option to be a "balanced option" as previously defined by the Department of Labor.
• Employers as Fiduciaries: Both bills limit the employer's fiduciary status. Under the Senate bill employers would have no fiduciary liability for the investments if they use a provider who is on the approved list or who uses R-bonds as an investment. Under the House bill, employers would reportedly have no liability for employee investment decisions. Under either bill, contributions would have to be forwarded by the end of the month following the month the amounts would have been paid in cash. As described in the official summaries, the employer's sole disclosure responsibility would be to provide its employees with a standardized form explaining the program and investment decisions.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2010, Deloitte.

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.