The President's idea on the "Automatic Workplace Pension"

Contained in the President's budget proposal for the Department of Labor is the President’s idea on the “Automatic Workplace Pension”. (Go here for the budget proposal.) The proposal is to require employers that don’t sponsor retirement plans to automatically establish IRAs for their employees and to automatically pay part of the employees’ wages into the IRAs, subject to the employees’ right to opt out of the system.

The proposal doesn’t specify the amount of the automatic contribution. Presumably, the contribution would be set at the maximum contribution that a taxpayer may make to an IRA, namely, $5,000 for taxpayers under 50 for the 2009 tax year, subject to the employee's right to decrease the contribution. (It is possible, but I don't think likely, that, for taxpayers aged 50 and over, the contribution would be set at $6,000, which is the limit currently applicable to them.)

At present, the President’s proposal doesn’t require contributions of employer money. However, the Saver’s Credit is expanded under the President’s Budget and could well function as an employer administered match of employee deferrals to automatic IRAs on the model of COBRA premium assistance under the American Recovery and Reinvestment Act (“ARRA”).

The "Saver’s Credit" was added to the tax code by the Economic Growth and Tax Relief Reconciliation Act of 2001 and made permanent by the Pension Protection Act of 2006. See Code Sec. 25B. The Saver’s Credit is a credit equal to a certain percentage of up to $2,000 in employee deferrals to an IRA, 401(k) plan, or other retirement vehicle (including 403(b) annuities and 457 plans), reduced by distributions from such vehicles. The percentage match varies with the employee’s adjusted gross income, as shown in the following table, phasing out at adjusted gross income of $50,000 or more for married taxpayers filing jointly.


Married filing jointly Head of hsehld All others Credit
$0-$30,000 $0-$22,500 $0-$15,000 50% of contribution
$30,001-$32,500 $22,501-$24,375 $15,001-$16,250 20% of contribution
$32,501-$50,000 $24,376-$37,500 $16,251-$25,000 10% of contribution
Over $50,000 Over $37,500 Over $25,000 credit not available


The President’s budget proposal expands the Saver’s Credit by providing for a 50% match of the first $1,000 deferred to an eligible retirement plan vehicle by families having adjusted gross income of no more than $65,000. (It is not yet clear how the President’s proposal articulates with the above table.)

If the Saver’s Credit were administered in the same manner as COBRA assistance premiums under the ARRA—namely, by offset to the employer’s payroll taxes—then the Saver’s Credit could be contributed by the employer on a pay period basis to the employee’s automatic IRA. However, the President’s proposal does not yet provide for administering the credit in such a fashion.

John, February 27, 2009