On November 12, 2020, House Ways and Means Committee Chairman Neal (D-MA) released a “discussion draft” of a new “Automatic Retirement Plan Act of 2020.” In this article we review Chairman Neal’s proposal.
Under the proposal:
Employers with more than 10 employees would generally be required to maintain an “automatic contribution plan”
May be a qualified plan, 403(b) plan, IRA, or SIMPLE IRA
May satisfy with a new, employee contribution-only 401(k) plan, with an $8,000 contribution limit, not subject to nondiscrimination testing
Sponsors with certain pre-Act plans would be grandfathered
Failure to maintain an automatic contribution plan would result in an excise tax – $10 per employee per day subject to certain limits
Would generally exempt employers from compliance with state plan initiatives other than those adopted prior to enactment
Since at least the beginning of the Obama Administration, a “universal” automatic retirement contribution requirement, under which all (or almost all) American workers would be covered by a retirement plan or IRA that defaulted them into retirement savings at an adequate rate, has been a goal of Democratic policymakers.
Efforts to adopt such a program at the federal level have been stymied by Republican objections to the imposition of an “employer mandate.” And in response certain states – led by California, Oregon, and Illinois – have adopted their own auto-IRA programs that are (generally) mandatory for employers who don’t otherwise provide a retirement savings program.
These state plan initiatives have raised two issues under ERISA – preemption and ERISA coverage (e.g., by ERISA’s fiduciary rules). The Obama Administration sought to create a “path forward” for these state plans, which was effectively revoked by Congressional Review Act legislation and Trump Administration action in 2017.
Notwithstanding that Trump Administration and Congressional action, states have continued to pursue state auto-IRA programs, and there is currently litigation over California’s CalSavers program, challenging it as preempted by ERISA.
As we noted in our recent article Biden Administration agency agenda, a Biden Administration is likely to revive Obama Administration agency initiatives meant to enable the state plan movement.
In this context, some sponsors are concluding that a federal solution may be preferrable to a patchwork of state programs. Chairman Neal’s “Automatic Retirement Plan Act of 2020” is intended to provide that solution.
Under the proposal, employers would generally be required to maintain an “automatic contribution plan.” Failure to comply would trigger an excise tax.
In what follows, we are going to focus on how this requirement may be met by employers maintaining a tax qualified retirement plan, but (as noted) this requirement may also be met by maintaining a 403(b) plan, an IRA or a SIMPLE IRA.
What is an automatic contribution plan?
Generally, for a single employer plan to be an “automatic contribution plan” it must qualify under Internal Revenue Code section 401(a) (tax qualified single employer retirement plans will meet this requirement as a matter of course) and be either a “deferral only arrangement” or a “testing automatic contribution plan.”
A “deferral only arrangement” is a new sort of safe harbor 401(k) plan that does the following:
Defaults all eligible employees into the plan at a qualified percentage – at least 6% (but not greater than 10%) for the first full plan year, increasing each year thereafter to 10%
Allows employees to elect out of this default
Allows only elective contributions (e.g., no employer contributions)
Limits those elective contributions to $8,000 per year (with an increased catch-up amount at age 50 of another $1,000)
In effect this is a “skinny” employee-contribution only 401(k) with no nondiscrimination testing.
A “testing automatic contribution plan” is a “regular” 401(k) plan that meets all the other 401(k) rules (including, e.g., nondiscrimination testing or safe harbor rules), that defaults eligible employees into contributions at the same rate specified for deferral only plans (6% in the first year, scaling up to 10%).
Grandfather current plans
The new requirement would be satisfied by current tax qualified retirement plans that have been maintained for at least one year prior to the date of enactment that have not been amended to substantially decrease benefits “in a manner that demonstrates an intent to avoid the purposes of the Act.”
The automatic contribution plan must also meet the following rules:
Eligibility: the general Internal Revenue Code eligibility rules apply (e.g., 1 year of service/age 21), except that the requirement (included in recently proposed SECURE 2.0 legislation) requiring coverage of part-time employees working more than 500 hours per year for two consecutive years is picked up.
Investment: Unless the participant elects otherwise, contributions must be invested in either (i) a target date fund that meets ERSIA qualified default investment alternative (QDIA) rules or (ii) a combination of such a TDF and a principal preservation fund, a balanced fund (that meets the QDIA rules), a guaranteed lifetime income option (meeting rules issued by DOL), or any other class of investment authorized by DOL.
Lifetime income requirements: Except for plans with 100 or fewer employees and participants whose balance is $5,000 or less, the plan must permit participants to elect to receive at least 50 percent of their vested benefit in the form of a lifetime income/annuity.
As we noted, in addition to using a qualified plan, an employer may satisfy the proposed automatic contribution plan requirement by adopting a 403(b) plan, an Automatic IRA arrangement, or a SIMPLE IRA that meets many of the same requirements applicable to qualified plans.
Treatment of state plan programs
Employers maintaining an automatic contribution plan would generally not be subject to any state plan requirements adopted after the date of enactment. Pre-enactment plans (that aren’t otherwise superseded by ERISA (e.g., via preemption)) are grandfathered.
Excise tax for failure to comply
Employers that do not comply with the new rule must pay an excise tax of (generally) $10 per employee per day. Where the employer participates in a grandfathered state plan (discussed below), this tax would not apply. The excise tax is limited to $500,000 per year for unintentional failures, and there are generous correction provisions.
Finally, the new tax would not apply for the first three years of a new business or to employers with 10 or fewer employees.
The excise tax is generally effective beginning with the 2022 plan year but is delayed until 2024 (for employers with more than 100 employees) and until 2026 for employers with 100 or fewer employees.
Increase in the small plan startup credit, limit to automatic contribution plans
The small plan startup credit (applicable to employers with 100 or fewer employees) would be extended to five years (from the current three). And for employers with 25 or fewer employees, the credit would be 100% (rather than the current 50%).
This credit, which currently is generally available (for eligible employers) with respect to all tax qualified retirement plans, would under the proposal be limited to plans that meet the new definition of “automatic contribution plan.”
Republicans remain opposed to this sort of legislation, which (as noted) they consider an “employer mandate.” It is significant that, unlike the recent SECURE 2.0 proposal, Chairman Neal’s automatic contribution plan proposal does not have bipartisan support.
The fate of this legislation may in part depend on the results of the Senate elections in Georgia, which may determine control of the Senate. It is also possible that sponsor frustration with individual state initiatives may result in pressure on (some) Republicans to withdraw their objections.
We will continue to follow this issue.