Ways and Means Greenlights Automatic Retirement Arrangements

The House Ways and Means Committee has approved the retirement subtitle of the Build Back Better Act, legislation supported by the American Retirement Association as a way to help close the coverage gap and boost the existing retirement savings system. 

The retirement subtitle, which is estimated to cost nearly $47 billion over 10 years, was approved by the Committee Sept. 9 on a near party-line vote of 22-20. Reps. Stephanie Murphy (D-FL) and Ron Kind (D-WI) voted against the retirement legislation. It will now be sent to the House Budget Committee to be packaged with a larger set of other proposals as part of the budget reconciliation bill—the cost of which could reach $3.5 trillion—before moving to the full House of Representatives for consideration. 

Among other things, the legislation would require employers without employer-sponsored retirement plans to automatically enroll their employees in IRAs or 401(k)-type plans. It also would provide an increase in the credit limitation for small employer pension plan startup costs and adds a new credit for certain small employer automatic retirement arrangements. The legislation also modifies the Saver’s Credit by turning it into a government-based matching contribution and making it refundable.

“Our country currently faces a retirement income crisis,” Ways and Means Committee Chairman Rep. Richard Neal (D-MA) said in his opening statement. “Nearly one-third of Americans have no retirement savings at all, and about half of working-age households risk being unable to maintain their current standard of living after retiring.” 

In advocating for his proposed automatic IRA and Saver’s Credit enhancements, Neal cited an analysis commissioned by the ARA that implementing these proposals could add up to $7.3 trillion in additional retirement savings over a 10-year period and create more than 63 million new retirement savers. That analysis was referenced in a Sept. 7 letter from the ARA to Neal. 

Republican Opposition

Republican members on the Committee were not as thrilled with the overall proposal, however, arguing that it steps away from the bipartisan approach taken under the SECURE Act 2.0 legislation approved by the Committee in May. 

“Ensuring Americans have the resources they need for a prosperous retirement has always been a bipartisan priority of this Committee,” Rep. Kevin Brady (TX), the Committee’s Ranking Republican, said in his opening statement. “We can be proud of the work that we’ve done together, which is why I have profound disappointment that now we are taking a partisan approach on retirement.” 

Brady offered various amendments attempting to either replace or add the SECURE Act 2.0 to the retirement subtitle, but those efforts were rebuffed by the Committee’s Democrats. He also attempted to strike the proposed tax on employers that do not comply with the auto-IRA provision, but that effort was also defeated.  

Other amendments defeated along party-line votes included one that would have struck the requirement for automatic contribution plans to offer a lifetime income option within a plan.

Automatic Contribution Arrangements

As explained by the Joint Committee on Taxation, the underlying legislation provides that employers which have been in existence for at least two years, do not sponsor a retirement plan, and employ five or more people, must automatically enroll those employees in an IRA or 401(k)-type plan. Failure by the employer to maintain an auto-enrollment plan or facilitate an auto-enrollment arrangement would result in an excise tax liability of $10 (adjusted for inflation) on any failure with respect to an employee for each day in the noncompliance period. Existing qualified plans would be grandfathered under the proposal. 

The auto enrollment rates would be provided at a default rate of 6% for an employee’s first year, and would gradually escalate to 10% by the fifth year. Employees would have the option to opt out of participating. 

In addition, the proposal modifies the existing small employer startup cost credit by providing a new credit of $500 to help small employers (those that employ 100 individuals or less) start up an auto enrollment plan. It also increases the credit amount of the current law startup credit to 100% for small employers that employ 25 or fewer employees.  

Saver’s Credit. The proposal would also change the present law Saver’s Credit by making it fully refundable and requiring that it be contributed directly to a Roth IRA or designated Roth account of the taxpayer, thus, acting as a matching contribution for savers.

The income thresholds for eligible employees to claim this credit for their savings would also be increased for individuals earning up to $25,000 and families earning up to $50,000, but the credit base that qualifies for the credit would be reduced to $1,000 (adjusted for inflation), instead of the current $2,000. As such, an eligible individual would be allowed a refundable income tax credit up to either $500 (adjusted for inflation) or 50% of the first $1,000 of qualified retirement savings contributions made by the individual to his or her retirement account. Contributions put into an ABLE account for disabled individuals would also be a qualifying saving purpose under the legislation.

Bumpy Road Ahead

It should be emphasized that the Ways and Means Committee’s approval is one of the first in many steps in the legislative process. The retirement provisions could still be amended. In addition, the Senate Finance Committee will also have its own set of proposals, which may or may not resemble the House’s version. Any differences between the House and Senate would have to be reconciled. In addition, several Democrats have expressed concern in recent days about the size and direction of the underlying budget reconciliation package. Despite that, House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Charles Schumer (D-NY) have vowed to push on with the $3.5 trillion budget outline. 

For more details on the Subtitle B retirement provisions, click here. The legislative text for the retirement provisions (Subtitle B) is available here, and a Joint Tax Committee description of the legislation is here.