Senators John Kerry (D-MA) and Jeff Bingaman (D-NM) have reintroduced legislation that would establish an automatic individual retirement account (IRA) enrollment program for employees at firms with more than 10 employees that do not already offer retirement plans. The Automatic IRA Act of 2011 (S. 1557) would enable employees to contribute to these IRAs on a voluntary basis through automatic payroll deductions. Employers would be provided a $250 tax credit for each of the first two years of the program’s operation to offset costs associated with its establishment.
In a press release, Sen. Kerry claimed that creating automatic IRA enrollment was an idea included in President Obama’s FY 2011 budget proposal, and “is a common sense reform to make it easier for American workers to save for retirement without adding to the cost for their employers.”
As outlined in a summary of the measure, (pdf) key provisions of this bill include the following:
- If enacted, the provisions of this bill would be phased in over a four-year period for employers that do not already offer qualified retirement plans. In the first year, the provision would 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. An employer with fewer employees could opt in at any time.
- The automatic enrollment requirement would not apply to employers who have been in business for less than two years. Governmental or religious organizations would be exempt as well.
- Employees eligible to take part in the voluntary enrollment program must be at least 18 years old and have been employed for at least three months.
- Failure to comply with the automatic IRA program would result in an excise tax of $100 for each employee who was supposed to be covered. Employers that make unintentional mistakes would have the opportunity to self-correct.
- Employers would contribute a default percentage of 3% (or another amount to be set via regulation) of an employee’s paycheck into the employee’s Auto IRA account.
- Employees would have the choice of contributing to either a traditional IRA or a Roth IRA. If no choice is made, automatic IRA accounts would be established, by default, as Roth IRA accounts. The bill would direct the Treasury Department to create a website to help employers locate appropriate providers. In the alternative, the employer could allow each individual employee to send contributions to an IRA provider selected by the employee.
- An employer would be prohibited from self-dealing, and would be required to transmit the 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 Auto IRA. Employers that fail to do so would be subject to an excise tax.
- Employers would have no fiduciary liability under the Employee Retirement Income Security Act (ERISA) if they use a provider that is on a list of approved providers or use retirement bonds. An employer’s sole disclosure responsibility would be to provide the employee with a standardized form explaining the program and investment decisions.
- A small employer that adopts a new qualified plan would be entitled to a tax credit of up to $1,000 or 50% of the employer’s start-up costs, whichever is the lesser amount. This credit would be available for up to three years.
- Automatic enrollment plans would not be subject to employer matching contributions.
This bill has been referred to the Senate Finance Committee.
Photo credit: Kirby Hamilton