Two retirement savings bills, introduced into the House Ways and Means committee by Rep. Richard Neal, D-Mass., would require all but the smallest employers to offer an automatic deferral defined contribution plan, while also aiming to simplify the existing retirement savings rules.
The Automatic Retirement Plan Act of 2017 would exempt churches, governments, employers with fewer than 10 employees and businesses that have been around for less than three years from complying with the rule.
The plan would not require employers to make contributions on behalf of their employees and would offer a new start-up credit for all employers with 100 or fewer employees. For those plans with 25 or fewer employees, the start-up credit would cover 100% of the plan’s costs for five years up to $5,000. For those with more than 25 employees, the credit is equal to 50% of plan costs, up to a maximum credit of $5,000 over five years and would limit the credit to adoptions of the required plan type.
Small companies that adopt the required type of automatic enrollment plan would be entitled to an annual tax credit equal to $500 for five years.
The bill also provides relief from the one bad apple rule applicable to multiple employer plans, experts says, so that all employers in a MEP won’t be penalized when one employer violates the qualification rules. Because open MEPs would be available, it would relieve small employers of all fiduciary and administrative duties, other than passing on contribution amounts and conveying needed information, such as employee lists and payroll data. The fiduciary relief only applies if the MEP provider receives reasonable compensation, agrees to assume all fiduciary responsibility not retained by the employer, and notifies the employers of their obligations under the MEP.
Many states, like Oregon, have already adopted an automatic IRA program. This bill allows those states to continue with their programs and exempts them from implementing this new program.
To qualify under this bill, plans would have to offer participants automatic enrollment at 6%. They also would be required to offer automatic enrollment triennially at 6%, meaning that if an employee opts out of the 6% contribution rate in their first year, by the fourth year of the plan, they would be defaulted into the 6% contribution rate unless they opt out again. If an employee decides to contribute more than the 6% rate, their accounts would be subject to automatic escalation of 1% per year up to 10%.
Cathy Weatherford, president and CEO of the Insured Retirement Institute, says the bill is a “common-sense private-sector solution” for employees to save more for their retirement. Not only does expand access for who choose to participate in a workplace plan but it also “preserves employer choice, competition and protections for small businesses,” she says.
She adds that many of the measures included in Neal’s bill, including opening MEPs to small businesses, expanding automatic savings and escalation features and increasing default contributions and automatic escalation rates for savings are “all proposals IRI has long supported.”
Meanwhile, the Retirement Plan Simplification and Enhancement Act of 2017 would expand retirement plan coverage and increase retirement savings. The bill establishes a new automatic enrollment safe harbor in which the minimum default level of contributions would be 6% in the first year and escalate by 1% each year thereafter until it reaches a 10% cap.
Employers under the provision would be required to make matching contributions on behalf of all eligible non-highly compensated employees equal to 100 cents on the dollar on employee or elective contributions up to 1% of pay; 50 cents on the dollar on the next 5% of pay; and 25 cents on the next 4% of pay so that some level of matching contributions must be provided on employee or elective contributions up to 10% of pay.
Currently, employers can exclude part-time workers from participating in their 401(k) or 403(b) retirement plans. This rule would require employers to cover part-time employees after they reach one year of service or 1,000 hours of work or three consecutive years of service where the employee completes at least 500 hours of work.
