Employees in firms with ten or more employees that do not sponsor a retirement plan would be automatically enrolled in IRAs at their workplace under legislation that has been introduced in the House and Senate. The Automatic IRA Bill of 2010 (S. 3760, H.R. 6099) was introduced in the Senate on August 5, 2010 by Sen. Jeff Bingaman (D-NM) and in the House on August 10, 2010 by Rep. Richard Neal (D-MA). The bills are based on a proposal in the President's FY 2011 budget.
Covered employees
The Auto IRA bill would apply to firms with 10 or more employees (counting employees who earned more than $5,000 in the prior year). An employer that already maintains a qualified retirement plan would not generally be required to offer an Auto IRA. However, if such an employer generally does not cover employees in a division, subsidiary, or other major business unit, the employer would have to provide an Auto IRA to those employees.
CCH Note: The bills are not identical. The House bill would apply to employers with 10 or more employees. The Senate legislation would phase in the coverage requirements over a four-year period. In the first year, the Senate bill would apply to firms with 100 or more employees; in the second year, 50 or more; in the third year, 25 or more; and in the fourth, 10 or more. This is designed to give retirement service providers time to prepare for a significant expansion in the number of IRA accounts and regulators time to address enforcement and other regulatory issues.
The bill would not apply to employers that have not been in existence for two full years. Nor would it apply to governmental or church employers. To offset administrative costs, employers would receive up to a $250 tax credit for each of the first two years of Auto IRA operation.
Under the bill, employees who have been employed for at least three months and employees who have attained age 18 as of the beginning of the year would be automatically enrolled in an Auto IRA, but would be allowed to affirmatively opt out. An employer that fails to offer an Auto IRA for its employees would be subject to an excise tax of $100 for each employee who was supposed to be covered. Employers that make an innocent error would have the opportunity to self-correct to avoid penalties.
Default contributions
The bill sets the default contribution rate at 3% (or "such other percentage prescribed in regulations"). Employees would be allowed to raise or lower their contribution percentage, or opt out entirely. 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 traditional IRAs.
Investment options
Under the bill, Auto IRAs would offer one of three standardized investment options: a Principal Preservation Fund, a Target Date/Lifecycle Option, or a Balanced Option, the latter two being defined by the Department of Labor previously as qualified default investment options. The accounts would be portable and rollovers could be made into and out of other IRA and qualified plan accounts.
Fiduciary and disclosure rules
Employers would have no fiduciary liability for the employees' investment decisions. The employer would be required to transmit 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. An excise tax would apply if the employer fails to remit contributions on time.
Under the bill, an employer's sole responsibility would be to provide the employee with a standardized form explaining the program and investment decisions.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.