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1 1 (August 04, 2020)

handle is hein.crs/govdbez0001 and id is 1 raw text is: 01;0i E.$~ & August 4, 2020 State-Administered IRA Programs: Overview and Considerations for Congress While Congress addresses retirement security at the national level and establishes federal pension law and savings incentives, several states have enacted or implemented state-administered retirement savings programs to increase retirement plan access and savings among private-sector workers. Because retirement plans, such as 401(k)s or defined benefit plans, are optional for employers to adopt, some workers may not have access to employment-based retirement benefits. In March 2019, 33% of private-sector workers did not have access to a workplace retirement plan. State-administered retirement programs are intended to provide savings options for workers whose employer does not offer a workplace plan. States are taking a variety of approaches to these programs, including the following: retirement marketplaces, in which employers and individuals can purchase a savings plan through different state-approved providers; multiple- employer plans, in which unrelated businesses may jointly sponsor a 401(k) plan; and payroll deduction Individual Retirement Accounts (IRAs), in which employers deduct a portion of pay from an employee's paycheck and deposit it into the employee's own IRA (a tax-advantaged retirement savings account regulated at the federal level). This In Focus describes the most common state-administered program the payroll deduction IRA. Table I. State- and City-Administered Retirement Savings Program Approaches (enacted programs as of July 2020) Program Approach States Retirement Marketplace NM, WA Multiple-Employer Plan MA, VT Payroll Deduction IRA CA, CO,a CT, IL, MD, NJ, NM,a NY,a OR, WA (Seattle only) Source: Congressional Research Service (CRS). Notes: New Mexico (NM) enacted a combination of approaches. a. New Mexico and New York have payroll deduction Individual Retirement Account (IRA) programs that are optional for employers to adopt; other states' programs are mandatory for employers. Both program types allow employees to opt out once enrolled. Colorado program details are not yet available. In some state programs, employer participation is mandatory (with some exceptions). In other state programs, employer participation is voluntary. Typically, eligible employees of participating employers are automatically enrolled in a state program but can opt out at any time. Because of the automatic enrollment feature, these plans are sometimes referred to as automatic, or auto, IRAs. As of July 2020, six states have enacted auto IRA programs (Maryland, Colorado, Connecticut, New Jersey, New Mexico, and New York), and three states have implemented auto IRAs (California, Oregon, and Illinois). Employer participation in New Mexico and New York is optional (see Table 1). One city Seattle, WA has also enacted an auto IRA program. State-administered auto IRA programs share many features. A state retirement board oversees each program and is responsible for making program decisions, such as contracting with an IRA provider. Some programs are optional for employers to adopt; other programs are mandatory for nonexempt employers. Generally, exempt employers (1) are under a certain size or (2) already offer an employer-sponsored pension plan. The programs in place also allow self-employed workers and those who do not work for a participating employer to self-enroll. Among the programs in place as of July 2020, the default accounts are Roth IRAs. Contributions to Roth IRAs are made with after-tax income, and withdrawals in retirement are generally tax-free. The programs also offer a traditional IRA option. Contributions to traditional IRAs may be tax deductible for individuals who do not have access to an employer-sponsored retirement plan. Because individuals with income over a certain threshold cannot contribute to Roth IRAs (e.g., a single filer with income of $139,000 or higher in 2020), some employees may have to opt out or choose the traditional IRA option. State-administered IRA programs are subject to federal IRA contribution limits, which in 2020 generally are $6,000 ($7,000 for individuals aged 50 and over). The programs in place do not allow for employer contributions. They each have a 5% default contribution rate, which means that 5% of an employee's pay is deducted when an employee is automatically enrolled but does not choose a contribution rate. The state-administered programs in place also have an auto-escalation feature, which is a gradual increase in the worker's contribution rate over a specified number of years. Contributions from individuals with income under certain thresholds may be eligible for the federal Retirement Savings Contribution Credit. Employees can withdraw original contributions from Roth IRAs at any point. Any earnings withdrawn prior to age 591/2 from accounts that are not at least five years old are included in taxable income and generally subject to a 10% K~:> p\w -- , gnom goo mppm qq\ a , q 'S I 11LULANJILiN,