Senator Jeff Bingaman, a New Mexico democrat, introduced the Automatic IRA Act of 2010 last week. The new legislation would require all firms with 10 or more employees that don’t already offer a retirement plan to automatically enroll workers in an IRA. Workers who don’t wish to participate would need to take action to opt out or change the default contribution amount and investments. Here’s a look at how this bill, if passed, would affect you.
Standardized 3 percent savings rate. Employees age 18 and older who have been employed for at least 3 months would be automatically enrolled in an IRA. The bill currently sets 3 percent of a worker’s paycheck as the default amount that would be withheld and directly deposited into an Automatic IRA account. Workers can raise or lower their contribution amount or opt-out of the program at any time. Contributions could qualify for the savers’ tax credit. No employer contributions would be permitted to automatic IRAs.
Default account is a Roth IRA. The default retirement account would be a Roth IRA, but employees would be given the option to contribute to a traditional IRA. Income tax is due on Roth IRA contributions in the year the deposit is made, but distributions, including interest, are tax free in retirement. Traditional IRAs offer the tax deduction up front, but income tax is due upon withdrawal.
Default investment is a Retirement Bond. The default investment for new savers would be a R-Bond, a new type of Treasury Retirement Bond that would be designed for use with the Automatic IRA. Once the amount saved exceeds $5,000, future contributions would, by default, be invested in a life-style or balanced fund. Individual savers can override these default investment choices at any time. A third investment choice with a higher concentration of equities would also be offered to all account holders, but savers would not be automatically enrolled in it.
Picking a provider. An employer can select an IRA provider for all employees or allow individual workers to each pick their own IRA provider. A Treasury website would list providers that meet regulatory requirements. Employers that don’t want to make that choice can have a provider selected for them from a group of default private-sector providers.
Large companies first. In the first year after enactment, the legislation would only apply to firms with 100 or more employees each earning over $5,000 per year. The threshold would drop to 50 employees in the second year, 25 in the third year, and finally ten in the fourth year after the law is adopted. Smaller employers could opt in before that date.
Tax breaks for employers. Companies would receive a $250 tax credit for each of the first two years of Automatic IRA operation to offset administrative costs. Employers that fail to offer an automatic IRA to workers would be subject to an excise tax of $100 for each employee who was supposed to be covered.
Keep the retirement plan you have now. Employers that already offer a retirement plan would not be required to make changes. The legislation would not apply to employers that have not been in existence for two years and government or church employers. In order to encourage the creation of retirement plans in addition to the Automatic IRA, the bill would also increase the maximum tax credit small businesses can get for launching a new 401(k) plan from $500 to $1,000.