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1 1 (March 18, 2022)

handle is hein.crs/govehce0001 and id is 1 raw text is: Congre &conaI Resedrch Sen/ce Inf ormning I eg iltive debate sine 1914 Updated March 18, 2022 State-Administered IRA Programs: Overview and Considerations for Congress Overvi ew While Congress addresses retirement security at the national level and establishes federal pension and other 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 2021, 32% 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 without 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 March 2022) Program Approach States Retirement Marketplace NM, WA Multiple-Employer Plan MA, VT Payroll Deduction IRA CA, CO, CT, IL, ME, MD, NJ, NM, NY (and New York City, NY), OR, VA, WA (Seattle only) Source: Congressional Research Service (CRS). Notes: New Mexico (NM) enacted a combination of approaches. In November 2021, New Mexico and Colorado signed an agreement to operate a joint IRA program. New York State and New York City have both enacted programs. In some state programs, employer participation is mandatory (with some exceptions). In other programs, employer participation is voluntary. Typically, eligible employees of participating employers are automatically enrolled in a 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 March 2022, seven states (Colorado, Maine, Maryland, New Jersey, New Mexico, New York, and Virginia) and two cities (Seattle, WA; and New York City, NY) have enacted auto IRA programs, and four states have implemented auto IRAs (California, Connecticut, Oregon, and Illinois). In November 2021, Colorado and New Mexico announced that their programs would form a partnership. Stat-Admin tered Automatic RAs 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. Some programs 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 March 2022, the default accounts are Roth IRAs. Contributions to Roth IRAs are made with after-tax income, and withdrawals in retirement are generally tax-free. Some 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 $144,000 or higher in 2022), 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 2022 are $6,000 ($7,000 for individuals aged 50 and over). The programs do not permit employer contributions. They have default contribution rates ranging from 3% to 5%. The default rate is the percentage of an employee's pay that is deducted when an employee is automatically enrolled but does not choose a contribution rate. Several of the programs also have an auto-escalation feature, which is a gradual increase in the worker's contribution rate over a specified number of years. Employees can withdraw original contributions from Roth IRAs at any point. Any earnings withdrawn prior to age 59½ from accounts that are not at least five years old are included in taxable income and generally subject to a 10% penalty. Employees who change employers or move out of state can keep the same IRA or transfer savings to a different IRA.