On September 7, 2021, House Ways and Means Committee Chairman Richard Neal (D-MA) released text for elements of the Build Back Better Act, the Democrats’ fiscal year 2022 budget reconciliation legislation. (The federal 2022 fiscal year begins October 1, 2021.) 

Subtitle B of this legislation relates to retirement policy and includes Chairman Neal’s Automatic Contribution Plan or Arrangement (ACPA) proposal, generally requiring all but the smallest employers to provide an automatic contribution retirement plan (e.g., a 401(k) plan with an automatic contribution feature) or auto-IRA for all employees.

In this article we review that ACPA proposal.

Most employers with five or more employees must maintain an ACPA

Under the proposal, subject to limited exceptions and a grandfather rule for current plans, private employers with more than five employees must maintain an ACPA. Failure to comply triggers an excise tax of $10 per day/per employee, up to a $500,000 per year limit.

Plans in existence on the date of enactment are grandfathered

Generally,  any  Internal Revenue Code section 401(a) (tax qualified) retirement plan that is “established and maintained by an employer as of the date of enactment” qualifies as an ACPA, including, e.g., a 401(k) plan that doesn’t provide for automatic enrollment/automatic contribution or a defined benefit plan. There appear to be no restrictions on the application of this rule (e.g., the grandfathered plan may be amended after enactment and is not required to provide any minimum benefit).

This rule will generally mean that for current employers already maintaining a qualified retirement plan covering most employees, the new ACPA requirement would only apply to excluded groups (with no current retirement plan coverage) and to “brand new” plans – e.g., a new, separate plan for a newly established business line.

Non-grandfathered ACPAs

To qualify as an ACPA, a 401(a) plan that does not come within this grandfather rule must be a defined contribution plan that provides for elective deferrals (that is, a 401(k) plan) and must meet certain  notice, eligibility, contribution, investment, and lifetime income  requirements. 

The proposal creates a new, “deferral only” safe harbor 401(k) plan (not subject to actual deferral percentage (ADP) testing) that only permits elective contributions, up to a limit of a $6,000 (plus, for participants 50 and over an additional $1,000 catch up contribution).

Certain SIMPLE IRAs (generally meeting the notice, contribution, investment, and lifetime income requirements described below) and a (newly created) automatic IRA arrangement may also qualify as ACPAs.

Applicable requirements

The  notice requirements  generally track those applicable to 401(k) safe harbor plans (e.g., notice of the automatic contribution and option to elect out).

The  eligibility requirements  generally require coverage of employees 21 or over after no more than one year of service (two years for certain long-term part-time employees). Exclusion of employees in collective bargaining units is allowed.

The  contribution requirements  require automatic enrollment/automatic contributions (subject to the opt out) at the following rates:

Year of coverage Minimum automatic contribution % of pay
First full year 6%
Second year 7%
Third year 8%
Fourth year 9%
Fifth (and following) year(s) 10%

The  investment requirements  require that contributions be defaulted to a target date fund that meets DOL qualified default investment alternative (QDIA) rules.

The  lifetime income requirements  require that, with respect to accounts of more than $200,000, the participant must be able to elect a lifetime income distribution (e.g., a life annuity) of at least 50 percent of the account.

Effective date

These rules are generally effective beginning in 2023.

Financial incentives for small employer plan startup and low-income savings

Also in Subtitle B:

Small employer plan startup/automatic contribution credit :   An extension of the small employer plan startup credit, an increase in that credit for employers with 25 or fewer employees, and a restriction of that credit to ACPAs for years 2023 and after.

Revised Saver’s Credit : A new tax credit for low paid savings called the “Saver’s Match,” replacing the current “Saver’s Credit.” The new credit is equal to 50% of the first $1,000 of qualified retirement savings contributions (including, e.g., contributions to a 401(k) plan or IRA) made by individuals filing joint returns with modified adjusted gross incomes up to $50,000 (phased out between $50,001-$70,000). (The income limits are lower for head of household and single filers.) The credit is paid to the “applicable retirement savings vehicle” elected by an eligible individual. An applicable retirement savings vehicle may be a Roth IRA or a Roth account in, e.g., a 401(k) plan. The new Saver’s Match is effective beginning 2025.

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As noted, Subtitle B is part of the Democrat’s budget reconciliation legislation that is likely to dominate the Congressional legislative agenda this Fall.

We will continue to follow these issues.

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