October 05, 2021

Nearly all employers would have to offer retirement plans with automatic enrollment, and the saver’s credit would turn into a government matching plan contribution under the current House version of a roughly $3.5 trillion budget package. Other retirement-related proposals would ban Roth conversions in employer plans and cap retirement benefits for high earners. The size and scope of the package to carry out much of President Biden’s domestic agenda will likely shrink in coming weeks. Democrats have yet to reach the consensus needed to get a budget reconciliation bill through the 50-50 Senate without any Republican support. Although the retirement provisions may change as the Senate weighs in, they stand a good chance of surviving in any final package. Whether Democrats can reach a deal that can pass both chambers is uncertain. Ongoing negotiations aimed at bridging intraparty differences appear likely to continue for weeks, if not months.

Requirement to maintain an automatic contribution plan or IRA

A provision based on past proposals from Ways and Means Committee Chair Richard Neal, D-MA, would mandate that employers with more than five employees maintain either a defined contribution (DC) plan or a payroll-deduction IRA with automatic contribution features and other design requirements. Employers that fail to comply by 2023 would incur excise tax penalties.

 

The mandate would not apply to governmental and church employers or companies in business less than two years. State-run automatic IRA programs and multiple-employer plans (MEPs) in place before the bill’s enactment would be exempt, and employers participating in such programs would not be subject to the excise tax. Employers with a qualified retirement plan — apparently including a defined benefit plan — a 403(b) plan, a simplified employee pension plan (SEP) or savings incentive match plan for employees (SIMPLE) IRA in place before the bill’s enactment would be deemed to satisfy the mandate, even if the plan does not offer automatic enrollment.

 

Requirements for automatic contribution plans

Under the bill, an automatic contribution (AC) plan would be a 401(k) or 403(b) plan that has the following features:

 

• Eligibility. Automatic enrollment would apply to all eligible employees, but employees could elect not to participate. Eligibility requirements generally follow current rules for auto-enrollment plans, except part-time workers would become eligible after 500 hours of service in each of two consecutive years (instead of three).


• Employer contributions. Employers would not have to contribute.


• Minimum deferrals. The minimum automatic deferral would be at least 6% (but not higher than 10%) of compensation for the first plan year and would increase by at least 1% a year to reach 10%. Higher escalation rates could be used but would be subject to a 15% cap. Employees could elect different contribution rates.


• Default investments. Absent a participant’s affirmative investment election, participant contributions would have to be invested in a target-date or life cycle fund.


• Lifetime income option required. Participants with vested accounts exceeding $200,000 could choose to receive at least 50% of their account balance as guaranteed lifetime income. This feature would be exempt from nondiscrimination testing under Internal Revenue Code Section 401(a)(4).


• Fees. No "unreasonable" fees or expenses could be charged to participants.


• Help for small employers. Tax credits would be available to help defray small employers’ AC plan start-up costs, but would not be available for “deferral-only” plans or automatic IRA arrangements (see below).


• Enforcement. Employers that fail to maintain an AC plan would generally owe a $10 (indexed) per employee excise tax for each day of noncompliance, but exceptions for unintentional failures could cap, reduce or eliminate the tax. Employers would not owe any tax for failures due to reasonable cause that are corrected within 9-1/2 months of discovery — which may be shorter than the time frame for correcting qualification failures under the Employee Plans Compliance Resolution System.

New category of 401(k) deferral-only arrangements

A new type of 401(k) plan called a “deferral-only arrangement” would have the same automatic enrollment and minimum deferral contribution rules as AC plans, but would prohibit employer contributions entirely. These plans would be treated as satisfying the actual deferral percentage (ADP) test and would not require top-heavy testing if they meet these requirements:

 

• Lower contribution limits. Employee contributions would be capped at the contribution limits that apply to IRAs — currently $6,000 (annually indexed) — which are significantly less than the 401(k) plan contribution limits. Starting at age 50, employees could make catch-up contributions of up to $1,000 (annually indexed).


• Employee notice. Deferral-only plans would have to meet the notice requirements that apply to qualified automatic contribution arrangements.

Requirements for automatic IRA arrangements

Employers offering an automatic IRA arrangement would have to deposit similar amounts from employees’ paychecks into their IRAs. Other requirements are generally similar to those for AC plans, with the following exceptions:

 

• The IRA would not have to offer a lifetime income option.


• Certain types of investment options beyond target-date and life cycle funds would have to be available, including principal preservation and balanced funds

One issue left unaddressed in the bill is whether these arrangements would be subject to ERISA. Absent a specific exception, the answer is likely yes, as the Department of Labor’s 1975 safe harbor for non-ERISA payroll-deduction IRA programs precludes automatic enrollment.

 

Expansion of saver’s credit

Effective in 2025, the bill would restructure the currently nonrefundable saver’s credit into a refundable, government matching contribution for middle- and moderate-income workers. Recipients could direct the credit only to Roth accounts in workplace savings plans or Roth IRAs that accept these amounts. Saver’s credit contributions would not count against any applicable contribution limits and would be disregarded in nondiscrimination testing.

 

Eligible taxpayers could receive a credit of up to $500 (annually indexed) equal to a percentage of contributions made to their retirement savings accounts.

 

Limits on Roth conversions, large account balances

Retirement-related revenue-raising provisions in the budget package include:

 

• Roth conversions from retirement plans prohibited. Conversions of employee after-tax contributions in qualified retirement plans and IRAs into Roth-designated accounts or Roth IRAs would be prohibited for all taxpayers, starting in 2022.


• All Roth conversions banned for high earners. Roth conversions — including ordinary rollovers and so-called “back door” conversions — would be prohibited for high-income taxpayers (individuals earning $400,000–$450,000, depending on their filing status), starting in 2032.


• Contribution limit and mandatory distributions for large account balances. High-income individuals who have more than $10 million (annually indexed) combined in their DC plan and IRA accounts would be barred from making additional contributions to a traditional or Roth IRA. These individuals would be subject to mandatory minimum distributions for accounts exceeding that level and to immediate distributions from Roth accounts if aggregate balances in tax-preferred accounts exceed $20 million (annually indexed).


• Employer reporting duties. Employers would have to report DC account balances exceeding $2.5 million (annually indexed) to the IRS and the employee.

Related resources

• Description of budget bill’s retirement-related revenue-raising proposals (Joint Committee on Taxation, Sept. 13, 2021)
• Legislative text of retirement-related revenue-raising proposals (pp. 665–689) (House Ways and Means Committee, Sept. 12, 2021)
• Description of budget bill’s AC plan and saver’s credit proposals  (Joint Committee on Taxation, Sept. 7, 2021)
• Legislative text of proposals to require AC plans and expand the saver’s credit (House Ways and Means Committee, Sept. 3, 2021)