The $3.5 trillion budget plan Democrats are advancing on Capitol Hill includes the first-ever federal mandatory framework for workplace retirement plans, a policy that could result in the single biggest influx of new plans and first-time savers in U.S. history.
The House Ways and Means Committee approved the retirement mandate, 22-20, late Sept. 9, sending it to the House Budget Committee where it will be considered for a final budget package Democrats may send to the House floor. The tax proposal expected to accompany that spending package would cap wealthy savers’ tax-favored contributions. It’s expected to go before Ways and Means Committee as early as this week.
1. Would the plan make retirement saving mandatory?
Not exactly; it would require employers with more than five workers to automatically sign new hires up for retirement benefits, the contributions to which would automatically increase over time. It’s mandatory for employers, but not their employees, who can choose to opt out of the savings plan or change their contributions. But the default choice would always be to save, essentially making retirement funds a statutory benefit like unemployment or workers’ compensation insurance.
Failure to provide a low-cost retirement option such as a 401(k) or individual retirement account would cost a business an excise tax liability of $10 for every worker per day of noncompliance, which would add up fast.
2. Why is this in the budget proposal?
Americans aren’t saving enough for retirement. The Government Accountability Office reports that nearly half of people 55 and older have nothing saved for when they stop working, meaning a wave of future retirees threatens to overburden an already fragile Social Security Administration and upset a balanced economy that relies on older Americans spending money in the housing and health-care sectors.
Auto-enrollment and auto-escalation programs already in effect in some states and at some private companies have proved successful at closing that gap, particularly for workers of color in retail and service sectors of the economy that in the past have rarely offered retirement benefits to low-income staff. Democrats believe addressing the retirement gap now will save social welfare programs in the future and inject lifetime wealth into communities that lack it.
3. What kind of retirement plans would be required?
Starting in 2023, businesses would automatically deduct 6% of new workers’ income into a low-cost retirement plan and automatically escalated that contribution to 10% over time, unless workers themselves opted for something different.
The Democrats’ proposal borrows from mandatory state auto-IRA programs such as those in California, Illinois, and Oregon. Employers could choose as a default option a tax-advantaged Roth IRA invested in a target-date fund. Roth IRAs tax income upfront, so the money workers contribute would always be available to them. State programs have opted for the more liquid Roth IRA format, too, because recent evidence shows that low-income workers don’t have enough money set aside for emergency costs, either.
The proposal also carves out another easy, low-cost option for employers, too: They wouldn’t have to contribute a match, and they could take advantage of an expanded tax credit to cover the costs of starting up a new plan. To make up for employer buy-in, the proposal includes a little-known refundable tax credit called the Savers Credit, so up to $500 a year would be added to a worker’s IRA directly from the U.S. Treasury.
4. How much would all of this cost?
The retirement portion of the Democrats’ Build Back Better Plan is projected to cost about $47 billion over 10 years, split almost evenly between Savers Credit and auto-IRA provisions. To pay for it, Democrats began circulating an accompanying tax proposal Monday that would take aim at the way they say some wealthy Americans have used existing retirement savings vehicles as tax shelters.
Workers with qualified retirement accounts exceeding $10 million couldn’t contribute extra and would have to comply with stricter required minimum distributions, according to the tax outline. The proposal also would prohibit Roth conversions for those making more than $400,000 annually, preventing the wealthy from taking advantage of post-tax savings accounts. If the bill passes in both the House and Senate, most of the tax changes would take effect as early as next year.
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