Tucked into the embattled federal budget reconciliation bill is a possible mandate forcing small businesses with five employees or more to offer an automatic IRA arrangement or 401(k)-type plan.
“Under the proposal, starting in 2023, employers with five or more employees would have to offer a retirement plan and automatically enroll employees, diverting 6% of their pay to a retirement account. An automatic escalation clause would increase the automatic contribution to 10% of pay by year five. The default plan would be a Roth IRA invested in a target-date fund, a mix of investments based on your expected retirement year,” explains Forbes’ Ashlea Ebeling.
Here are some vital points:
- Employers will not be required to contribute, and employees can opt-out or reduce the amount they contribute electively. The mandate also only applies to employers who have been in business for two years or more.
- Chief Investment Officer points out that the bill sets target-date funds (TDFs) as the default investment and requires available investments to include those and only principal preservation funds and balanced funds with no other investment alternative allowed. Employers that do not comply with the requirements would be subject to an excise tax of $10 per day per employee not covered by an automatic contribution plan or arrangement.
- The American Society of Pension Professionals and Actuaries asserts that several types of retirement, annuity, 403(b) plans, automatic IRA arrangements, and SIMPLE IRAs may qualify, too. A new type of 401(k) plan is proposed in the bill called a deferral-only arrangement. However, Forbes’ Elizabeth Bauer reports employers may need to choose from a list of approved providers.
- Some states already require retirement plan options, including auto-IRAs for employees of small businesses. Check with your HR/payroll experts if you employ—even remotely—any individuals who live in Oregon, California, Connecticut, Maryland, New Jersey, Colorado, Virginia, Maine, New York City or Seattle. Federal law does not preempt these state mandates.
- There’s talk of a potential new option for small businesses called pooled employer plans (PEPs), which allow unrelated companies to join together in a shared 401(k) plan. They may provide small businesses with an alternative to traditional, state, or federal-sponsored auto-IRAs.
If you already have a 401(k) or another retirement program in place for employees, that plan can be grandfathered in and subjected to fewer requirements if it meets the proper criteria. There are other provisions included in the bill that affect employer retirement programs as well: a tax credit for those starting plans, an increase in credit limitations for small-employer pension plan startup costs, a modification of the Saver’s Credit, and more. For questions, feel free to contact us.