There is a proposal working its way through Congress that, if it becomes law, will require most employers to offer a 401k Plan or 403b Plan, or a SIMPLE IRA Plan or direct-deposit traditional IRA. This mandatory Plan will be an employee-contributory, automatic enrollment plan.
There are exemptions for certain businesses: (1) with five or fewer employees; (2) that are in-business for less than two years; or (3) with a pre-existing plan – a “grandfathered plan” – that meets specific conditions.
Under the proposal, employees who are at least 21 years old will have to be covered by the Plan.
The law includes certain requirements for a mandatory 401k or 403b Plan.
First, as noted above, there will be an automatic enrollment feature. Unless the employee opts-out, employee contributions would be deducted from pay and made to the Plan at the rate of 6% of pay. There also will be “automatic escalation”: each year, the automatic deduction (i.e., contribution rate) would increase by 1%, capping at 10% of pay. The employer has the option to cap automatic escalation at 15% of pay, rather than 10%.
Also, unless the employee elects alternative investments, the default investment will be an age-appropriate target date fund or a life-cycle fund.
Furthermore, Plan participants with balances of at least $200,000 at the time of distribution must be permitted to elect to receive at least half of the balance in the form of a lifetime income payment option.
There will be enhanced tax incentives for small businesses that establish a mandatory 401k or 403b Plan, to offset startup costs. Employers with fewer than 26 employees would receive a tax credit of up to 100% of qualified startup costs for up to five years; those with 26-to-100 employees would receive a credit of up to 50% of qualified startup costs. This enhanced tax credit would be available beginning with the 2022 tax year.
An excise tax of $10 per day per employee will apply to any non-exempt employer that fails to establish a mandatory Plan.
According to data published by the Bureau of Labor Statistics earlier this year, in March 2020, two-thirds of private-sector employees had access to employer-provided retirement plans – 52% of those were covered by a defined contribution plan, such as a 401k Plan or 403b Plan.
The effective date is proposed to be plan years beginning after December 31, 2022 (i.e., 2023).
ACSI will monitor this proposal to determine if it becomes law. To learn more, contact firstname.lastname@example.org or www.acsi-ny.com.