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Regulation and Compliance > Legislation

Auto-IRA Provision in House Tax Bill Violates Securities Laws: ASA

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What You Need to Know

  • Current securities laws prevent an employer from establishing an IRA on behalf of an individual, ASA said.
  • Without changes, the legislation would require small businesses to use only 401(k) plans.
  • The bill mandates that any business with 5 or more eligible employees must offer an automatic retirement plan.

The automatic IRA provision in the House Ways and Means Committee’s tax package “directly conflicts with existing securities laws,” the American Securities Association told House Ways and Means Committee Chairman Richard Neal, D-Mass., Wednesday.

“Subtitle B’s requirement that qualifying SIMPLE plans and Automatic IRA Arrangements be established by employers without participation by the employee directly conflicts with existing securities laws,” Chris Iacovella, ASA’s CEO, told Neal in a letter.

“Current securities laws prevent an employer from establishing an IRA on behalf of an individual.”

Securities rules also impose know-your-customer, investment authorization, dispute resolution, and Regulation Best Interest requirements for IRAs, Iacovella continued, “that cannot be satisfied without action by the account holder (in this case, the employee of a small business). This means SIMPLE and automatic IRA plans cannot be opened automatically on behalf of an employee by an employer.”

Subtitle B of the House Ways and Means Committee’s Build Back Better legislation, H.R. 5376,  Iacovella told Neal, mandates that any business with five or more eligible employees must offer an automatic retirement plan.

It also creates three acceptable options of plans which businesses can offer: 401(k) plans, SIMPLE IRAs, and automatic payroll deduction IRA.

If a “technical fix” isn’t made to the Build Back Better budget reconciliation legislation, it “would require small businesses to use 401(k) plans as that would be the only option available to them,” Iacovella wrote.

“While 401(k) plans are an excellent option for some businesses, they are not appropriate for every business. The cost to establish a 401(k), the time and complexity of compliance, the fiduciary responsibility, and other obligations would cause many small businesses without sophisticated HR departments to violate the bill’s mandate,” Iacovella said.

Also, businesses that would like to establish a SIMPLE IRA or automatic IRA “for their employees but cannot because of technical legal flaws in the legislation could face a $10 per employee per day penalty,” Iacovella wrote. “This outcome would needlessly harm small businesses and their workers across America.”

The bill, as explained by Renu Zaretsky of the Tax Policy Center in a Wednesday blog post, would “require most employers that don’t offer retirement plans to start offering them in 2023 and to auto-enroll their workers. While workers could opt-out, decades of research suggests relatively few will.”


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