On June 17, the Senate Finance Committee released the Enhancing American Retirement Now (EARN) Act – its counterpart to the House-passed SECURE 2.0 Act – a massive bill that includes a number of key provisions supported by the American Retirement Association.
In fact, the committee has scheduled a June 22 markup to review the EARN Act, and with its publication — and recent approval by the Senate Health, Education, Labor, and Pensions (HELP) Committee of the “Enhancing Retirement and Savings to Complement Sound Investments for the Nest Egg” (RISE & SHINE) Act (S. 4353) Same Week—the contours of what a final end-of-year legislative package could look like are becoming clearer.
“ARA supports the EARN Act which includes a number of provisions aimed at increasing retirement plan coverage and making it easier for American workers to save,” said Brian Graff, CEO of the American Retirement Association. “We are also grateful for the leadership of Chairman Wyden, Ranking Member Crapo, Senators Portman and Cardin, and other members of the Senate Finance Committee for keeping this bipartisan process going. It’s great to see that helping the Americans achieving a comfortable retirement is something everyone can agree on.”
Among the nearly 70 provisions contained in the nearly $40 billion EARN Act are several proposals supported by the ARA, including:
- the recently introduced Starter K legislation;
- improved saver matching;
- enhancement of tax credits for the cost of new plans (similar provision included in SECURE 2.0);
- a new 401(k) security port corresponding to the stretch;
- reform of family allocation rules (similar provision included in SECURE 2.0);
- very heavy relief for excludable employees (similar provision included in SECURE 2.0);
- allow 401(k) safe harbors to replace SIMPLE plans mid-year;
- hardship distributions for emergencies;
- retroactive deduction of profit-sharing increases after the end of the year; and
- provide permanent rules for the use of pension funds in the event of a claim.
401(k) Starter Plans
A key piece of legislation that aims to help close the nation’s retirement savings gap is the establishment of new “starter” DC plans. Under this ARA-backed provision, an employer who does not currently sponsor a retirement plan would be permitted to offer a 401(k) starter plan (or a 403(b) safe harbor plan), which would require usually all employees are enrolled by default. in the plan at a compensation deferral rate of 3% to 15%. The limit for annual deferrals would be the same as the IRA contribution limit, which for 2022 is $6,000 with an additional $1,000 in catch-up contributions from age 50. This provision would come into force after 2023.
Improved Saver’s Match
The EARN Act would also change the existing savings credit for IRA and retirement plan contributions from a credit paid in cash as part of a tax refund to a contribution. government matching that must be deposited into a taxpayer’s IRA or retirement plan. The credit would be 50% of the contribution to the IRA or retirement plan up to $2,000 per person. The rate of the credit would gradually decrease between $41,000 and $71,000 for taxpayers filing jointly ($20,500 to $35,500 for single and married taxpayers filing separately; $30,750 to $53,250 for declaring heads of household). The provision would be in effect for years after 2026.
Stretch Match 401(k) Safe Harbor
As a proposal included in the Portman-Cardin bill, the provision would provide an alternative method of satisfying non-discrimination tests for 401(k) plans that default enroll employees in elective deferral contributions and make certain mandatory employer contributions. The provision would require default contributions to be no less than 6% in the first year and increase by 1% per year until the fifth and subsequent years, in which case the default must be at least 10%. The provision would require employer matching contributions of 100% of the first 2% of deferred compensation, 50% of the next 4% deferred and 20% of the next 4% deferred.
And if offered by a small employer (100 workers or less), the employer would be eligible for a tax credit with respect to the modified safe harbor requirements. Thus, a small employer that adopts a plan that meets the default enrollment requirements and employer matching contributions described above would be eligible for a tax credit generally equal to the sum of the employer’s matching contributions. ’employer. However, no credit would be available against matching contributions for highly paid employees and matching contributions eligible for the credit would be limited to the first 2% of an employee’s deferred contributions and only in respect of the first five years of employee participation. The provision would be effective after 2023.
EARN would also:
- Allow a pension plan service provider to offer employer-sponsored plans automatic portability services and provide a $500 credit to small employers (100 or fewer employees) who enter into an automatic portability arrangement.
- Require the Treasury to simplify and standardize the rollover process by publishing sample forms for direct rollovers that can be used by both the incoming and outgoing pension plan or IRA.
- Eliminate the 25% threshold of a participant’s account balance imposed on QLACs (qualifying longevity annuity contracts), increase the dollar limit to $200,000 (indexed) (instead of $135,000) and clarify that survivor benefits can be paid in the event of divorce.
- Clarify that an employer-sponsored tax-advantaged plan does not violate tax eligibility rules if the plan does not request a refund or if the plan is amended to account for overpayments.
- Reform family allocation rules (provision supported by the ARA).
Additional Provisions
In addition to the provisions highlighted above, the EARN Act contains several other provisions that are substantially similar to the House SECURE 2.0 legislation passed in March, including:
- allow 403(b) plans to participate in multiple employer (MEP) plans and pooled employer (PEP) plans;
- treat student loan repayments as optional deferrals for matching contribution purposes;
- allow higher catch-up ceilings after age 60 [specifically, allowing participants to elect to contribute an additional $10,000 (indexed) annually beginning between age 60 and 63 ($5,000 for SIMPLE plans), effective after 2023];
- the elimination of the additional 10% tax that applies to early distributions from tax-advantaged retirement accounts (eg, 401(k) plans and IRAs) in the case of eligible distributions to victims of domestic violence;
- allow a pension scheme to rely on an employee’s certification that the conditions for a hardship allocation are met, and provide regulatory authority for exceptions to that reliance;
- increase the age of the required start date for mandatory distributions;
- remove the minimum distribution barriers required for life annuities;
- setting up a database of lost and found retirement savings;
- expansion of the Employee Plan Compliance Resolution System (EPCRS); and
- implementing a safe harbor for employee elective deferral failure fixes.
The cost of the roughly $38 billion bill would be offset by several provisions, including one specifying that elective deferrals would generally be limited to the regular contribution limit, so that a qualified plan under Section 401 ( a), a 403(b) plan or a government 457(b) plan that allows an eligible participant to make catch-up contributions must require that such catch-up contributions be designated as Roth contributions. This proposal alone is estimated at $25 billion by the Joint Tax Committee.
And after?
Note that the provisions highlighted above represent only an overview of the various changes included in the Finance Committee’s EARN Act.
Following the presumed approval of his bill by the Finance Committee on June 22, the two bills are expected to be merged during consideration by the full Senate. And then, once the Senate approves its retirement security legislation, this bill will then need to be reconciled with the SECURE 2.0 passed by the House before final passage, which is expected in the coming months. .
Of course, as this bill progresses through the legislative process, it is subject to change.
A section-by-section summary of the EARN Act is here; a Joint Tax Committee Analysis of legislation is here; and one Joint Tax Committee Revenue Estimate of legislation is here.
