The Democrats’ upcoming package of proposed social spending includes a host of significant changes to how Americans can save for retirement over the coming years and decades. The provisions – if passed – would be one of the most sweeping changes to the private pension system since the SECURE Act was passed in 2019.
Susan Neely, president and CEO of the American Council of Life Insurers, backs the proposals, telling Yahoo Finance that “the punch line is that it will be a huge leap forward in closing the retirement savings gap that was a problem in this country before the pandemic.” .”
Last week, two committee Democrats joined each Republican to vote against the provisions, but nonetheless the proposal was passed from the House Ways and Means committee in a 22-20 vote. The measure will then be added to the larger Reconciliation Act, which will be decided in the coming weeks.
Companies ‘must automatically enroll their employees’
Perhaps the most far-reaching part of the proposal is the requirement for many companies to offer a retirement plan for their employees.
But that doesn’t mean everyone gets a 401(k). Instead, companies that have been in business for at least two years and with five or more employees must “automatically enroll their employees in IRAs or other automatic contribution plans or schemes” if they don’t already offer a plan.
Businesses would receive a tax credit to offset administrative costs and those who do not follow the rules would be penalized with excise duties.
In certain states, this kind of mandate actually already exists. California, Illinois, Oregon, Colorado currently have programs that require employers to automatically put some of their employees’ paychecks into a “statewide IRA” if they’re not covered otherwise. to be. A large number of other states have mandatory programs that will come online in the coming years.
Participating employees may increase or decrease their membership level or opt out of the program completely, but they are opted in by default.
Experts say auto-enrollment is the key to getting more people to sign up. census survey from before the pandemic found that 79% of US employees work for a company that offers a retirement plan, but only 41% of employees contribute to a plan.
The hope is that the auto-enrollment aspect will change the proportions. Neely’s group estimates that the Democratic plan will open up retirement savings to an additional 35 million Americans, and approximately 30 million Americans will reap the benefit because they automatically become members.
A second major change to the bill would make changes to: the SAVERS credit, an existing tax provision that gives certain lower-income individuals a tax advantage when they set aside money for their retirement. The bill, among other changes, would extend the credit by making it refundable so that even those who don’t owe federal taxes are eligible for the benefit.
Earlier this year, the Biden administration and Congressional Democrats made a similar change to the child tax credit, which is currently available to all families regardless of income tax due. Democrats also plan to make the child tax credit permanent in upcoming legislation.
The legislation also has a series of smaller changes to the pension system, including new tax credits to help small businesses set up their own IRA or Simplified Employee Retirement Plans (SEP) for their employees. Another change would make it possible to send all or part of your tax refund directly to your retirement account.
In total, the extensive Savings Credit expected cost $23 billion, if passed. The provisions for automatic retirement contributions would cost an additional $24 billion in the coming years.
other changes, released in the commission’s tax plan, are intended to generate additional income. One proposal would add a contribution limit to the retirement plans of high-income people with account balances in excess of $10 million. Another proposal would introduce an increase in the minimum required benefits for high-income earners with similarly large pension balances.
Other rule changes are also being proposed, including one to limit options for a so-called “backdoor” Roth IRA.
The political response
The main Democrat behind the proposal, House Ways and Means Committee Chair Richard Neal (D., Mass.), has touted the proposal“Automatic IRAs would particularly benefit Hispanic, Asian and black populations in the United States, as they are less likely to have access to work-sponsored retirement plans.”
A recent letter of the American Retirement Association, a professional association of companies in the retirement industry, estimates the provisions could add $7 trillion to U.S. savings accounts and more than 62 million new retirement savers over the next decade.
Republicans, led by House Ranking member Kevin Brady (R., Texas), say he is “deeply disappointed” by the bill and that “Main Street now faces a tough new Washington mandate and a tax fine if you fail to do so.” does not keep the law.”
In recent months, the committee had tabled another pension bill known as SECURE Act 2.0 on a bipartisan basis – championed by both Neal and Brady – and sent it to the full House of Representatives, where it appears to have stalled for the time being.
Ben Werschkul is a writer and producer for Yahoo Finance in Washington, DC.
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