Compliance News

February 2012

Automatic IRA Act of 2012

On February 16, 2012, Representative Richard Neal (D-MA) introduced the Automatic IRA Act of 2012 (H.R. 4049). This proposed legislation would require employers that dont sponsor a retirement plan to automatically enroll employees into a payroll deduct Individual Retirement Account (IRA).

Covered Employers and Employees

The automatic IRA requirement would apply to employers that employed more than ten employees on a typical business day during the preceding calendar year. The number of employees includes those who earned more than $5,000 in the prior year. The automatic IRA requirement would not apply to: Employers that maintain a qualified retirement plan that covers employees in all divisions, subsidiaries, and business units. Businesses that have not been in existence for two full years. Governmental or church employers. Employees who have been employed less than 3 months and who have not attained age 18.

Contributions
Employers would contribute a 3% of pay default percentage into the employees automatic IRA. Employees could raise or lower the contribution amount or opt out of the program entirely. The contribution would qualify for the savers tax credit. Employers could choose either a traditional or Roth IRA. If no choice is made, the default would be a Roth IRA. Employers could choose an IRA provider from a list of approved providers published by the United States Treasury Department (Treasury). As an alternative, an employer could allow each individual employee to select an IRA provider. An employer may also send contributions for the purchase of a retirement bond (R-bond) to be established by Treasury.

Investment Options
All automatic IRAs must offer three standardized investment options (as developed by the Internal Revenue Service (IRS) and the Department of Labor (DOL)) which include: A principal preservation fund a bank or credit union savings account, certificate of deposit, savings bond, or R-bond.

A target-date/life-cycle option an option that meets the definition of a qualified default investment alternative (QDIA) under the DOL regulation 2550.404(c)-5(e)(4)(i). Balanced fund option a class of funds that also meets the QDIA requirement.

Fiduciary Issues
Here are some fiduciary issues discussed in the proposed legislation: Employers would have no fiduciary liability for the investment decisions made by employees. Employers must transmit employee contributions by the end of the month following the month in which the cash would have been paid had it not been contributed to the automatic IRA. An employers sole responsibility would be to provide employees with a standardized form explaining the program and investment decisions.

Other Issues
Here are some other issues related to the automatic IRA: To offset administrative costs, employers could receive a tax credit of $25 multiplied by the number of qualifying employees for the first calendar year (maximum $250), plus $500 for the first year and $250 for the second year. The automatic IRA could be rolled into (or out of) other IRA and qualified retirement plans. A provider of automatic IRAs would not be permitted to assess unreasonable additional fees based solely on low account balances. An employer that fails to offer an automatic IRA would be subject to an excise tax of $100 for each employee who was supposed to be covered. Employers could avoid the excise tax by providing an automatic IRA arrangement by 90 days after realizing a failure has occurred.

Next Step
This proposed legislation is a House of Representatives version of the Automatic IRA Act of 2011 that was introduced in the Senate last year. It has been referred to the Committee on Ways and Means and the Committee on Education and Workforce for review. We will keep you informed of any developments.

WELL GIVE YOU AN EDGE

Principal Life Insurance Company, Des Moines, Iowa 50392-0001, principal.com Prepared by Retirement & Investor Services Compliance. While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group (The Principal, Des Moines, IA 50392.

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022012