Obama Administration 2011 Budget Proposal Includes Enhancements to Auto-IRA and Saver’s Credit

February 08, 2010

The President’s FY2011 budget proposal, submitted to Congress in early February, generally does not change previous policy, but does include revisions that would expand both automated IRA enrollment and the Saver’s Credit.

Auto-IRA

If approved by Congress, the auto-IRA proposal will require employers that do not currently offer a retirement savings plan to automatically enroll their employees into a Roth IRA. Employees would be enrolled at a default rate of three percent of compensation. Auto-enrolled employees would have the option of ceasing participation, switching to a traditional IRA, or changing contributions from the default rate.

The Administration sees the auto-IRA as an opportunity to widely promote saving for retirement and increase employee participation in employer-sponsored savings plans. Critics argue that employers will be less likely to set up better plans for their employees, if they are only required to put the Roth IRA in place. Lack of federal oversight may also become an issue, they add.

Employers with 10 employees or fewer, and employers in existence for less than two years would be exempt. Historically, IRA proposals have not applied to state and local governments, so there is not likely to be any direct impact should the Auto-IRA proposal go into effect.

Saver’s Credit

Enhancements to the Saver’s Credit would make it fully refundable for up to $500 annually per person and require the credit to be deposited into an individual’s retirement plan or IRA. Additionally, the Administration plans to increase the modified adjusted gross income (AGI) limits for married couples jointly filing from $55,500 to $65,000; for singles from $27,750 to 32,500; and for head of households from $41,625 to $48,750.

The Saver’s Credit is a tax benefit that provides a credit of up to $1,000 (up to $2,000 if filing jointly) to eligible workers. The credit amount varies according to the taxpayer's AGI, with the highest amount offered to taxpayers with the least income. To be eligible for the credit a worker must be at least age 18, not a full-time student, cannot be claimed as a dependent on another person’s tax return, and must earn less than the AGI limits.

The proposed changes will make the credit similar to an employer match and increase the likelihood that low- and middle-income households will save for retirement. Changes to the Saver’s Credit are priced at $29.8 billion over 10 years.