Reconciliation Bill: Retirement

September 15, 2021

On Sept. 7, House Ways and Means Committee Chairman Richard Neal (D-Mass.) released part of the committee’s portion of the Build Back Better bill—the expected $3.5 trillion budget reconciliation measure to advance some of the more progressive items within the Biden administration’s legislative agenda.

The retirement subtitle, which is estimated to cost nearly $47 billion over 10 years, was approved by the Committee on Sept. 9 on a near party-line vote of 22-20. Reps. Stephanie Murphy (D-Fl.) and Ron Kind (D-Wis.) 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 before moving to the full House for consideration. 

This section requires employers without employer-sponsored retirement plans to automatically enroll their employees in IRAs or 401(k)-type plans and imposes an excise tax on an employer for failing to maintain or facilitate an automatic contribution plan or arrangement.

It establishes a new type of 401(k) plan, a “deferral-only arrangement” — a cash or deferred arrangement that meets certain requirements relating to (1) automatic enrollment, (2) elective contributions, and (3) employee notices — that is treated as satisfying the actual deferral percentage test comparing the ratio of highly vs. non-highly compensated employees.

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 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 percent for an employee’s first year, and would gradually escalate to 10 percent 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 percent for small employers that employ 25 or fewer employees.  

It 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, instead of the current $2,000. As such, an eligible individual would be allowed a refundable income tax credit up to either $500 or 50 percent 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.

While NSBA agrees more improvements should be done to further provide small businesses with more flexibility with respect to the tools and resources available to provide retirement options for them and their employees, this mandate is not the way to do it. Instead, it will place onerous regulatory and administrative burdens and tax penalty on small-business owners. Failure by the employer to maintain an auto-enrollment plan or facilitate an auto-enrollment arrangement would result in an excise tax liability. Now is not the time to be adding more taxes and requirements onto businesses who are still recovering from the pandemic. It is imperative for lawmakers to fully examine the direct and indirect costs of any changes or new requirements on the retirement options for small businesses.

Urge Lawmakers to Oppose Requiring Employer-sponsored Retirement Plans