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The Administration’s middle class tax initiative, announced by President Obama in his 2015 State of the Union speech, includes several retirement savings-related proposals. In connection with the State of the Union speech, the White House released a fact sheet describing the Administration’s proposals. In this article we briefly review those that relate to retirement savings.
With regard to retirement savings, the Administration highlighted four proposals:
Auto-IRA. Auto-IRA has been part of the President Obama’s retirement policy agenda since before he was first elected. The Administration’s current proposal is to require any employer who has more than 10 employees and does not offer a retirement plan to automatically enroll employees in an IRA, subject to an employee opt-out.
Tax credit for small employers who set up a plan or Auto-IRA. For employers with 100 or fewer employees, the Administration is proposing a one-time tax credit of $4,500 for setting up a plan (three times greater than the current credit) or $3,000 for setting up an Auto-IRA. Small employers who add auto-enrollment to a retirement plan would be eligible for a one-time tax credit of $1,500.
Expanding coverage of part-time employees. Currently, part-time employees (employees who do not meet certain annual service requirements) may be excluded from plan participation. Under the Administration’s proposal, plans would be required to allow “employees who have worked for the employer for at least 500 hours per year for 3 years or more to make voluntary contributions.”
Cap benefits at $3.4 million. The Administration is proposing a cap on the maximum benefit that may be accumulated by an individual in the combination of IRAs, defined contribution and defined benefit plans. The cap would be equal to “about $3.4 million, enough to provide an annual income of $210,000 in retirement.” This proposal has been included in prior Administration budgets. The application of this rule to DB plans is generally considered problematic.
Auto-IRA has never gotten much traction in Congress, for two reasons. First, it’s expensive (in terms of lost tax revenues), a serious draw-back in an era of tight budgets. And, second, experience with the Affordable Care Act has made policymakers skeptical of ‘mandates’ – even though the only mandate in the Auto-IRA is for the employer to maintain the program; participants still have the right to opt out. We note, however, that states are exploring the possibility of implementing their own Auto-IRA programs (see our article The Illinois Secure Choice Savings Program and the DOL myRA letter).
Tax incentives for plan start-ups already exist. Their expansion, along the lines proposed by the President, would cost money – how much would have to be determined by the Congressional Budget Office. Depending on cost, it is conceivable that there may be bipartisan support for some version of this proposal.
Expansion of coverage for part-time employees may be problematic for some employers. There is, however, widespread support in Congress for encouraging retirement savings by the estimated 75 million Americans workers not currently covered by a retirement plan.
Finally, support has been expressed by some Congressional policymakers for some sort of cap on total retirement savings balances. Generally, however, they would limit the cap to IRAs and DC plans, rather than tackle the complicated valuation, tracking and administrative issues raised if DB benefits are included.
In the last Congress, Senator Hatch (R-UT) and now Chairman of the Senate Finance Committee, sponsored the “Secure Annuities for Employee Retirement Act of 2013″ (SAFE). That bill included a number of proposals designed to encourage more retirement savings and new plan formation, including, e.g., a new 401(k) nondiscrimination safe harbor. As we understand it, Senator Hatch is working on a new version of this bill for the new Congress. It is onceivable that some of the Administration’s proposals might be included in the new SAFE bill, perhaps via a Democrat-sponsored amendment.
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We will continue to follow these issues.