New budget reconciliation bill could bring historic changes for U.S. private retirement system 

There is plenty of drama on Capitol Hill these days, as congressional Democrats work to dial in an enormous $3.5 trillion Budget Reconciliation bill formally titled the “Build Back Better Agenda.” The bill includes ambitious investments in social care, climate health, retirement security, and health care while seeking to pay for the boost in government spending with tax increases on corporations and wealthier taxpayers.  

The House Ways and Means Committee recently shared the details of the “social infrastructure” provisions within this package, and they include historic changes to both paid family medical leave and our private retirement savings system, as well as tax-raising provisions.  

Before diving into some of the key provisions benefiting employees, it’s helpful to first understand the legislative process—including the substantial headwinds the Democrats’ Budget Reconciliation bill is facing from within their own ranks. 

A reconciliation recap

This new bill is being developed under reconciliation instructions, a process unique to the Senate. Reconciliation allows tax, spending, and the debt limit legislation to be passed with a simple majority vote. And with Democrats holding majorities in both chambers, one might think that passage of this bill would be virtually assured. But, think again: That’s just not the case. 

 At $3.5 trillion, the Budget Reconciliation bill seeks to carve a middle ground between divergent factions of the Democratic party—finding balance between the progressives seeking greater spending and the more fiscally-conservative centrists. However, key members of the latter group, including Sens. Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ), are sending strong signals that they won’t vote for the current package unless it’s scaled down.  

This sets the stage for an intense, intraparty debate, especially once the bill lands in the Senate chambers. With no votes to lose, it’s highly likely that Senate Democrats will have to consider significant changes to scale-down the package before, or even if, it can pass the Senate. Any Senate-driven reduction in the spending package will be a difficult pill for many of their Democratic colleagues in the House to swallow, particularly the progressive wing of the party.  

 Key provisions for businesses and their employees

The Budget Reconciliation bill includes a number of landmark changes. Three provisions in particular would be impactful for both employers and their employees: 

1. Universal Paid Family and Medical Leave (PFML) – Establishes a new federal program guaranteeing up to 12 weeks of PFML for all workers. Employers offering a qualifying PFML program that’s at least as extensive as the federal benefits would receive 90% reimbursement from the government. The proposal would leave in place existing PFML laws in nine states and the District of Columbia, and potentially permit other states to develop their own programs.     While most workers would be covered by the new federal benefit, the plan includes carve-outs for workers whose states or employers already offer paid leave. If a plan sponsor currently provides or plans to provide paid leave benefits, they can continue to do so and receive the reimbursement.     This update could be a big win for workers, and may help diminish the fear of losing a job or paycheck if they need to take time away from work. Employers would still have the ability to retain or establish their own qualifying PFML program, along with significant subsidization from the federal government. This flexibility may be vital in structuring a unique program to better compete for talent.   

2. Automatic IRA/Retirement Plan – Updates would require most employers to sponsor one in a range of worksite retirement savings program options.      Among the options is a new type of program—the automatic enrollment payroll-deduct IRA (Auto-IRA). While several states have implemented this program for private sector workers, laws in most states prevent employers from automatically enrolling their employees in an IRA.  This bill would preempt those laws. Under the bill, employee contributions to an IRA would default to Roth treatment, unless an employee chooses Traditional IRA treatment. States with existing Auto-IRA programs would still be considered a qualifying option.    Employers could also choose to sponsor SIMPLE (Savings Incentive Match Plan for Employees) IRAs, 401(k)s, and other defined contribution (DC) plans.   

 Auto-enrollment and contribution escalation minimums would also be required for all new plans. These updates underline the federal government’s continued endorsement of best-practice plan design, including auto-enrolling employees at a minimum of 6% of pay—and auto-escalating contributions 1% per year to at least 10% of pay.  

 Yet, while the auto-feature plan design is an important step in helping workers establish appropriate contribution levels, the addition of employer contributions is necessary for many workers to achieve true retirement security. For example: If an employer matches up to 50% of an employee’s salary deferral up to 6%, there’s a potential for a 9% total contribution. Taking full advantage of these matching contribution could potentially bring the employee nearly $120,000 extra at retirement. (Note: Assumes $35,000 beginning pay, a 3% annual pay increase; hypothetical 6% annual rate of return; and a 50% match up to 6% contribution over 30 years. This is for illustrative purposes only and the assumed rate of return is hypothetical and doesn’t guarantee any future returns nor represent the return of any particular investment option. Amounts don’t reflect the impact of taxes on pre-tax distributions.)  

 To better incent employers to boost their employees’ savings, the start-up tax credit would also be expanded (relative to today’s credit), but reserved only for employers starting a DC plan with an employer contribution.  Employers starting all other plans, including Auto-IRAs, would receive a flat $500 credit. 

 With the proposed changes, if employees don’t have access to worksite retirement savings plans now, there’s a good chance they will in the future. Millions of new retirement accounts are anticipated to be established as a result of this legislation if enacted.  

Looking forward, both employees and employers may need assistance navigating these changes—working with a financial professional may help.  

3. Refundable Saver’s Credit – Structured to help support retirement savings, the Saver’s Credit is an existing tax credit available to low- to moderate-income individuals who have saved in an IRA or DC plan. The bill would both expand who is eligible and the size of the credit and make the credit accessible and refundable (even if it exceeds the individual’s tax liability). Rather than being applied as a tax credit, the government would deposit the updated credit into an individual’s retirement account. 

This credit could give a welcome savings boost to low- and moderate-income DC plan participants. But the government contribution will only be made as a Roth contribution. Plan sponsors will need to amend their plan if it doesn’t currently support Roth and if they intend to accept the government contributions.

 If consumers are eligible for the Saver’s Credit, the government will provide a 50% match on up to $2,000 of IRA and retirement plan contributions. Individuals would need to elect this option at tax filing time. 

 As the Build Back Better Agenda’s name implies, this bill is congressional Democrats’ initial blueprint to not only rebuild the economy to a pre-pandemic state, but also help working families get ahead. The ambitious legislation carries a large price tag—one that is receiving scrutiny even from within the party. But it aims to do some potential good, too, including: creating new jobs, helping workers care for loved ones, and providing access to worksite retirement savings options to millions of additional workers.  

Lance Schoening is Director of Policy at Principal, a leading global financial services company offering businesses, individuals, and institutional clients a wide range of financial products and services, with a strong emphasis on providing retirement plan solutions to businesses of all sizes and to their employees. Based in Des Moines, Iowa, Lance is responsible for analysis of proposed and new retirement legislation and regulation and advocacy efforts in conjunction with industry trades to promote policies that support retirement readiness efforts. Lance also serves as a policy board member of the American Benefits Council and chairs the Retirement Plans Committee of the American Council of Life Insurers.

The subject matter in this communication is educational only and provided with the understanding that Principal is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.  Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group, Des Moines, Iowa 50392. Principal, Principal and symbol design and Principal Financial Group are trademarks and service marks of Principal Financial Services, Inc., a member of the Principal Financial Group.