Sep 02, 2021
The SECURE Act, passed into law during the last few days of 2019, was designed to make retirement plans more accessible to employees and less cumbersome for employers to sponsor and administer. Some of the major changes included creating pooled employer plans (PEPs), requiring plans to cover part-time employees with three or more years of service, increasing the age for required distributions to 72, and creating more tax credits for plan sponsors. The full impact of many of these changes has yet to be measured, but legislators are forging ahead with more proposals intended to help American workers save for retirement. Two comprehensive proposals have been introduced in Congress this year that would build on the SECURE Act changes.
- The Securing a Strong Retirement Act (H.R. 2954), referred to as SECURE Act 2.0, was introduced in the House Ways and Means Committee by chairman Richard Neal (D-MA) and ranking member Kevin Brady (R-TX). In May 2021, the Committee unanimously voted to present the proposal to the full House for consideration and vote. This bill contains over 40 provisions to further change retirement plan rules to expand coverage and participation.
- The Retirement Security and Savings Act (S. 1770) was introduced to the Senate Finance Committee by Senators Rob Portman (R-OH) and Ben Cardin (D-MD). This bill includes many of the same provisions as the House’s SECURE Act 2.0, some identical and some with slight modifications, and introduces some new provisions. In July, the Senate Finance Committee held a hearing, “Building on Bipartisan Retirement Legislation: How Can Congress Help” to further explore ways Congress can build another bipartisan retirement package to help more Americans’ save for retirement.
The expansion of retirement savings opportunities generally has broad bipartisan support, which should help to keep these bills moving forward this year. Additionally, the two proposals already include many of the same provisions, which should reduce the amount of reconciliation needed between the two bills. Here are some of the popular provisions.
- Treat student loan payments as elective deferrals – Similar provisions in both acts would help workers who cannot afford to both save for retirement and pay off their student loans. Employers would be allowed to make matching contributions to an employee’s retirement plan account based on the employee’s student loan payments.
- Expand Saver’s tax credit – Provisions vary among multiple bills on how to expand this tax credit, but all are designed to encourage lower-income individuals to save for retirement. Proposals include making the credit refundable to a retirement plan or Roth IRA, increasing the amount of the credit, increasing the income levels eligible for the credit, and promoting the credit to increase consumer awareness. Another bill would require the federal government to provide a 50% matching contribution (up to a total of $1,000) to the individual’s retirement plan or IRA.
- Increase use of automatic enrollment and automatic escalation – Both acts contain provisions that are designed to promote or require plans to use automatic plan features. One would require new 401(k) and 403(b) plans to automatically enroll eligible employees at a default rate between 3% and 10% and automatically escalate their deferral rates by 1% per year up to a maximum of at least 10% but no more than 15%. The other would create a new ADP safe harbor plan that requires automatic enrollment at 6% with automatic escalation of 1% per year up to 10% and would also direct agencies to simplify the notice requirements for automatic enrollment and escalation.
- Expand tax credits for small employers – Again, the specifics vary but both acts would increase the small business plan start-up tax credit. Both would also create new credits including a tax credit up to $1,000 per employee for employers making contributions to the plan for the first five years of plan sponsorship and a tax credit for employers that allow military spouses to participate in the plan under relaxed eligibility and/or vesting rules.
- Allow financial incentives – Identical provisions in both acts would allow employers to provide small financial incentives to employees who participate in a 401(k) or 403(b) plan.
- Increase coverage of part-time employees – Similar provisions in both acts would reduce the three-year service requirement to two years for long-term, part-time employees to be eligible to participate in the plan.
- Increase catch-up contribution limit – Both acts would increase the catch-up contribution limit for defined contribution plans for older participants. One would increase the limit to $10,000, for participants aged 62–64, while the other would apply the increased limit to participants aged 60 and older with no phase out.
- Expand MEP/PEP participation – Similar provisions in the SECURE Act 2.0 and the Improving Access to Retirement Savings Act would allow 403(b) plans to be established as a MEP or PEP and clarify that the participation in a MEP/PEP qualifies a small plan for the start-up tax credit.
- Minimize application of required minimum distributions (RMDs) – Proposals vary but both acts would lighten the RMD rules, including provisions to increase the RMD starting age to 75 over 10 years, eliminate the RMD requirement for individuals who have less than $100,000 in retirement savings, exempt designated Roth accounts from the RMD rules, and reduce the excise tax for failure to take RMDs from 50% to 25% and down to 10% if the RMD is taken within two years.
- Simplify plan operations – Both acts would reduce the plan notice and disclosure requirements for eligible employees who are not participating in the plan and would allow for more operational errors to be self-corrected under the IRS Employee Plans Compliance Resolution System (EPCRS).
- Enhance services for missing participants – Identical provisions in both acts would require the creation of a Lost and Found database of retirement plan accounts for missing participants, require plans to transfer missing participant accounts under $1,000 to the Lost and Found, and increase the force-out threshold for missing participant account balances to $6,000.
These two big reform bills have garnered a lot of attention and, if passed as stand-alone legislation, would change many facets of retirement savings for employers and their workers. But legislators are not relying on the big bills alone to accomplish certain policy changes. Several smaller, more focused bills have been introduced this session to address some of the same issues included in the big bills.
- Encouraging Americans to Save Act – Expand the Saver’s Tax Credit
- Retirement Parity for Student Loans Act – Allow employers to make matching contributions based on student loan payments
- Improving Access to Retirement Savings Act – Expand application of MEPs/PEPs
- Military Spouses Retirement Security Act – Expand coverage for military spouses
- Retirement Savings Lost & Found Act – Address missing participant and uncashed check issues
- Increasing Your Retirement Act – Raise the RMD age to 75
- Women’s Retirement Protection Act – Expand retirement plan eligibility for part-time workers with two years of service
Whether Congress will be able to pass another big retirement package like the SECURE Act of 2019 remains to be seen. Even with bipartisan and industry support, comprehensive retirement plan legislation can take years to develop and pass. What the activity on Capitol Hill tells us today is which of the proposed changes appear to have the most support already. This could increase their chances of becoming law, even if included as small add-ons to broader tax legislation rather than as part of a big retirement plan package.
1 Department of Labor, Bureau of Labor Statistics, Employee Benefits in the United States News Release, September 2020, https://www.bls.gov/news.release/archives/ebs2_09242020.htm
This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Consult your own tax, legal and accounting advisors before making any decisions. Newport and its affiliates do not provide tax, legal or accounting advice.
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