Bill Would Create Automatic IRA Enrollment Program

A bill introduced in both the House and Senate would establish an automatic individual retirement account (IRA) enrollment program for employees at firms with more than 10 employees that do not already maintain a qualified retirement plan. According to a press release, the Automatic IRA Act of 2010 (H.R. 6099, S. 3760) is based on a proposal in the President’s FY 2011 budget, and builds upon the success of the 401(k) auto enrollment program promoted by the Pension Protection Act of 2006. Under the terms of the proposed legislation, contributions would be voluntary, and employers would be entitled to a tax credit of up to $250 for each of the first two years of the program’s operation to cover any expenses incurred in setting up the automatic enrollment (“Auto IRA”) accounts. Other key provisions affecting employers include the following:

• The automatic enrollment requirement will apply only to firms (excluding government or religion-based organizations) that have been in business for at least two years with 10 or more employees that have each earned more than $5,000 in the prior year.
• Employees eligible to take part in the voluntary enrollment program must be at least 18 years old and have been employed for at least three months.
• Employers that fail to provide Auto IRA enrollment would be subject to an excise tax of $100 for each employee who was supposed to be covered. If the failure was unintentional, employers would have the ability to self-correct to avoid a penalty.
• Employers would contribute a default percentage of 3% (or another amount to be set via regulation) of an employee’s paycheck into the employee’s Auto IRA account.
• An employer would be able to select (or allow employees to chose) an IRA provider to which all Auto IRA contributions from their employees would be sent. The bill would direct the Treasury Department to create a website to help employers locate appropriate providers. In the alternative, an employer would be able to send contributions for the purchase of a retirement bond (or R-bond) to be established by the Treasury Department.
• An employer would have no fiduciary liability under the Employee Retirement Income Security Act (ERISA) for its employees’ investment decisions. An employer’s sole disclosure responsibility would be to provide the employee with a standardized form explaining the program and investment decisions.
• An employer would be prohibited from self-dealing, and would be required to transmit the 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. Employers that fail to do so would be subject to an excise tax.
• A small employer that adopts a new qualified plan would be entitled to a tax credit of up to $1,000 or 50% of the employer’s start-up costs, whichever is the lesser amount. This credit would be available for up to three years.
• Automatic enrollment plans would not be subject to employer matching contributions.

The version of this legislation introduced in the House has been referred to the House Committee on Education and Labor. The Senate companion bill has been referred to the Senate Finance Committee.

A complete summary of the legislation can be found here. (pdf)

Photo credit: Kirby Hamilton