Obama 2011 Budget - Potential Impacts for Employers and PEOs

Commentary from StaffMarket Services - February 2010

Obamas Budget Proposal for 2011 contains major items for employers and PEOs. If the 2011 budget gets approved as proposed, PEOs will need to expand their offering to assist business owners with significant changes to their employment and accounting practices. Employer related subjects will include the following areas.

Automatic IRA Enrollment and Increase Tax Credit for Small Employer Plan Start Up Costs

Per the General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals: Page 17

Employers in business for at least two years that have more than ten employees would be required to offer an automatic IRA option to employees, under which regular contributions would be made to an IRA on a payroll-deduction basis. If the employer sponsored a qualified retirement plan, SEP, or SIMPLE for its employees, it would not be required to provide an automatic IRA option for its employees. Thus, for example, a qualified plan sponsor would not have to offer automatic IRAs to employees it excludes from qualified plan eligibility because they are covered by a collective bargaining agreement, under age eighteen, nonresident aliens, or have not completed the plan’s eligibility waiting period. However, if the qualified plan excluded from eligibility a portion of the employer’s work force or a class of employees such as all employees of a subsidiary or division, the employer would be required to offer the automatic IRA option to those excluded employees.

The employer offering automatic IRAs would give employees a standard notice and election form informing them of the automatic IRA option and allowing them to elect to participate or optdefault rate of three percent of the employee’s compensation in an IRA. Employees could opt out or opt for a lower or higher contribution rate up to the IRA dollar limits. Employees could choose either a traditional IRA or a Roth IRA (with Roth being the default). For most employees, the payroll deductions would be made by direct deposit similar to the direct deposit of employees’ paychecks to their accounts at financial institutions.

Payroll-deduction contributions from all participating employees could be transferred, at the employer’s option, to a single private-sector IRA trustee or custodian designated by the employer. Alternatively, the employer, if it preferred, could allow each participating employee to designate the IRA provider for that employee’s contributions or could designate that all contributions would be forwarded to a savings vehicle specified by statute or regulation.

Employers making payroll deduction IRAs available would not have to choose or arrange default investments. Instead, a low-cost, standard type of default investment and a handful of standard, low-cost investment alternatives would be prescribed by statute or regulation. In addition, this approach would involve no employer contributions, no employer compliance with qualified plan requirements, and no employer liability or responsibility for determining employee eligibility to make tax-favored IRA contributions or for opening IRAs for employees. A national web site would provide information and basic educational material regarding saving and investing for retirement, including IRA eligibility, but, as under current law, individuals (not employers) would bear ultimate responsibility for determining their IRA eligibility. Contributions by employees to automatic IRAs would qualify for the saver’s credit (to the extent the contributor and the contributions otherwise qualified), and the proposed expanded saver's credit could be deposited to the IRA to which the eligible individual contributed.

Employers could claim a temporary tax credit for making automatic payroll-deposit IRAs available to employees. The amount of the credit for a year would be $25 per enrolled employee up to $250, and the credit would be available for two years. The credit would be available both to employers required to offer automatic IRAs and employers not required to do so (for example, because they have not more than ten employees). In conjunction with the automatic IRA proposal, to encourage employers not currently sponsoring a qualified retirement plan, SEP, or SIMPLE to do so, the “startup costs” tax credit for a small employer that adopts a new qualified retirement, SEP, or SIMPLE plan would be doubled from the current maximum of $500 per year for three years to a maximum of $1,000 per year for three years. This expanded “startup costs” credit for small employers, like the current “startup costs” credit, would not apply to automatic or other payroll deduction IRAs. The expanded credit would be designed to encourage small employers that would otherwise adopt an automatic IRA to adopt instead a new 401(k), SIMPLE, or other employer plan instead, while also encouraging other small employers to adopt a new employer plan. The proposal would become effective January 1, 2012.

Potential Impacts for Employers and PEOs
Employers will need to ensure that all employees are made aware that they will be automatically enrolled in an IRA. Employers will need to deduct and remit IRA contribution funds to the appropriate entity that has yet to be defined by statute. In addition employers will need a way to track and demonstrate that employees who opt-out did so with full knowledge of the program and that they have declined to participate. Employers will also need to track what kind of IRA (regular or Roth) the funds are being remitted in to so the employee receives the proper tax withholding treatment. Many PEOs currently support the ability for employees to make automatic IRA contributions and also provide the appropriate pre-tax treatment (for regular IRAs).

Reference Links
http://www.treas.gov/offices/tax-policy/library/greenbk10.pdf
 

This material is designed to provide accurate and authoritative information in regard to the subject matter covered. It is furnished with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

---