Individual Income Tax Insights: Illinois Awaits Federal Green Light for Automatic IRA Program

IRA Piggy Bank

Illinois is the first state requiring employers who do not currently offer retirement plans to automatically enroll their employees in Roth IRAs under the Illinois Secure Choice Savings Program Act. The law takes effect June 1.

Although Roth IRA contributions are not deductible, qualified distributions from Roth IRAs are not includible in gross income. Furthermore, any growth of assets in Roth IRAs is tax free as well.

Program Requirements

The Secure Choice program affects private employers that have been in business more than two years, with 25 or more employees, and offer no retirement plan options. These employers must automatically enroll employees in Roth IRAs by administering payroll deductions and depositing the money into a “Secure Choice” account. Small employers with less than 25 employees may voluntarily elect to participate in the Secure Choice program.

Contributions are automatically set at 3 percent of each paycheck, but employees may change the amount. The accounts are portable, meaning employees may retain their accounts when switching jobs.  Although employees are automatically enrolled, they may opt out at any time.

Federal Considerations

Illinois is waiting for the U.S. Department of Labor (DOL) to green light the program’s implementation. Even if DOL approves the state’s plan, the Roth IRAs must also qualify for favorable tax treatment under the Internal Revenue Code.

Before Illinois can implement Secure Choice, the DOL must determine whether the program violates the Employee Retirement Income Security Act (ERISA). In particular, the DOL must determine whether the Roth IRAs mandated by Illinois constitute employer participation, which is preempted by ERISA.

Approximately 18 other states are considering similar plans and are awaiting the DOL’s decision.

Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page: Should the U.S. Labor Department allow Illinois to implement the Secure Choice Savings Program?

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