Congressman Neal’s Automatic IRA proposal

Throughout 2024 we are going to highlight policy initiatives whose fate may turn on November’s election. In this article we very briefly review Congressman Neal’s (D-MA) “auto-IRA/auto-plan” proposal (the Automatic IRA Act of 2024, introduced on February 7, 2024), which would generally require private employers that do not currently maintain a retirement plan to adopt a retirement plan or IRA program, with an automatic contribution feature.

Congressman Neal is the former Chairman of the House Ways and Means Committee. If Democrats win control of the House in 2024, it is likely he will again become Chairman of that committee and that this proposal will be included in any “SECURE 3.0” proposal introduced in the next Congress.

Who is not covered by the proposal

We begin with a discussion of which employers are (in one way or another) exempt from the proposal, the most important of which for plan sponsors is the provision that grandfathers current sponsors of qualified retirement plans.

Grandfather rule: Under the proposal, a qualified plan, section 403(a) annuity, section 403(b) program, SEP-IRA, or SIMPLE IRA established and maintained as of the date of enactment would be considered an “automatic contribution plan or arrangement,” and the employer maintaining that plan would therefore not be required to establish a new plan. As we understand it, however, where a grandfathered plan does not cover all employees, some sort of plan (a qualified plan or auto-IRA program meeting the requirements discussed below) would have to be provided for currently un-covered employees (other than those subject to a statutory exclusion, e.g., collectively bargained employees).

Also exempt from the proposal’s plan/auto-IRA mandate:

• Employers with no more than 10 employees.

• Employers that have been in existence for less than 2 years.

• Employers with respect to government and church plans.

• Employers who facilitate an arrangement under a “qualified state law,” defined as a state law enacted before 2027 “that requires certain employers to facilitate an automatic IRA arrangement pursuant to a payroll deduction savings program of the State.”

Requirements for plans

Employers to whom the proposal does apply must adopt an “automatic contribution plan or arrangement,” defined as a tax qualified defined contribution plan (or section 403(a) annuity or section 403(b) program), an auto-IRA, or a SIMPLE IRA that meets certain minimum requirements. With respect to qualified plans, those requirements are:

The employer must meet notice requirements similar to those applicable to (current) 401(k) safe harbor “qualified automatic contribution arrangements” (generally, you must explain ahead of time how the plan works, the participant’s right to make contributions or opt out, elections with respect to investment options, and any matching contributions).

All employees (other than those subject to a statutory exclusion) 21 and older with 1 year of service (or 2 consecutive years of “long-term part-time” service) must eligible.

Employee auto/default contributions must be:

• Year 1 – 6%

• Year 2 – 7%

• Year 3 – 8%

• Year 4 – 9%

• All subsequent years – 10%

Except with respect to employers with 100 or less employees, the plan must permit any participant with a vested account balance of at least $200,000 to elect to have at least 50% of her benefit paid as a life annuity.

The requirements for auto IRAs and SIMPLE IRAs are (with certain exceptions) similar.

Excise tax for non-compliance

Employers who fail to provide an automatic contribution plan or arrangement are subject to a $10 per employee/per day excise tax.

Limited preemption

The proposal would provide for limited preemption of state law:

• The proposal would supersede any state law that prohibits or restricts automatic IRA arrangements.

• Employers maintaining automatic IRA arrangements are not subject to state laws “facilitat[ing] a payroll deduction savings program” (other than under a qualified state law, as discussed above).

Outlook

This legislation is not expected to move this year. As noted, however, if Democrats take back control of the House of Representatives in the November election, it is likely to be included in any “SECURE 3.0” proposal.