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.
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.
Under the bill, an automatic contribution (AC) plan would be a 401(k) or 403(b) plan that has the following features:
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:
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:
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.
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.
Retirement-related revenue-raising provisions in the budget package include: