Last month, I reported on how California’s mandated payroll deduction IRA program known as CalSavers is being challenged in court as preempted by ERISA. CalSavers is California’s attempt to address the fact that many Americans do not have the opportunity to save for retirement at their workplace because their employer does not offer a retirement plan. The California Treasurer’s Office reports that 7.5 million Californians work for employers who don’t offer a plan. Other states such as Oregon and Illinois have also implemented a state mandated payroll deduction IRA program.
As mentioned last month, I have been critical of these programs because of the open issue of ERISA preemption. I have also been critical because the limits on how much can be contributed to an IRA are so much lower than those of employer sponsored retirement plans. An individual under age 50 can only contribute $5,500 annually to an IRA compared to $18,500 for a 401(k) plan. A Savings Incentive Match Plan for Employees (SIMPLE) plan, available for employers with 100 or fewer employees, allows employees to save up to $12,500 annually. Therefore, in speeches and presentations, I have encouraged retirement industry professionals to use the mandated IRA programs as incentive to persuade employers to adopt employer sponsored plans.
Now federal legislation has been introduced that, if passed, would also encourage small employers to adopt SIMPLE plans by increasing the limits on the amounts that can be contributed by employees. The SIMPLE Plan Modernization Act, S. 3197 (Act) was introduced in the Senate July 13 by Senators Susan Collins (R-ME) and Mark Warner (D-VA). The Act would raise the elective contribution limit for SIMPLE plans to $15,500 for employers with 25 or fewer employees. The catch-up contribution limit for employees over age 50 would also increase from $3,000 to $4,500. Additionally, employers with more than 25 employees but no more than 100, would have the option to provide these higher limits but it would cost them a corresponding increase to their mandatory employer contributions by one percentage point. The purpose of this cost is to continue to encourage such employers to consider transitioning to a traditional 401(k) plan.
SIMPLE plans were first created under the Small Business Jobs Protection Act of 1996 as a cheaper, easier retirement savings plan for small businesses. Through a SIMPLE plan, an employer contributes to the IRAs of participating employees. The employer must generally provide an employer contribution of either: 1) a 1 for 1 matching contribution up to 3% of the employee’s compensation contributed; or 2) a nonelective employer contribution of 2% of compensation for all eligible employees. Under the Act, these contribution amounts would increase to 4% and 3% respectively, for employers with between 26 and 100 employees who opt for the higher limits.
The Act is only a bill at this point and these days nobody can predict what will happen in Washington DC, but it does have bipartisan support. Additionally, it is a sign that Congress is willing to consider action to improve retirement saving. Federal legislation that encourages small businesses to adopt plans that permit employees to save for retirement at work, such as the Act, seems like a much simpler way to tackle the retirement savings crisis than leaving it to state laws that might be preempted by ERISA.