Congress poised to consider sweeping retirement plan changes
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted during the 116th Congress, making many important changes to the U.S. retirement plan laws. But a number of policymakers believe that, while the SECURE Act was a significant step in enhancing the retirement security of Americans, more is needed.
The new year ushered in a new Congress—the 117th—which will have a lot on its agenda. And while Democrats and Republicans often have different views on policy issues, improving the retirement system is one area where there has historically been broad bipartisan support.
In fact, two significant bipartisan bills were introduced in the 116th Congress. Senators Rob Portman (R-OH) and Ben Cardin (D-MD) introduced the Retirement Security and Savings Act in May 2019, and in October 2020, House Ways and Means Committee chairman Richard Neal (D-MA) and ranking member Kevin Brady (R-TX) unveiled the Securing a Strong Retirement Act. Each bill contains dozens of provisions that would impact participants in employer retirement plans and owners of IRAs.
Key provisions in these bills:
Permit 403(b) plans to invest in collective investment trusts. Under current law, 403(b) plans can invest only in annuities and mutual funds. While many larger 401(k)s have shifted from mutual funds to lower cost collective investment trusts (CITs) over the past several years, CITs have been off-limits for 403(b) plans. Both bills would permit 403(b)s to invest in CITs.
Permit matching contributions on behalf of employees who are repaying student loans. Many employees are unable to save for retirement through their employers’ plans because they are paying off student loans—so they are missing out on any matching contributions that their employers may make. The bills would permit employers to make matching contributions to 401(k), 403(b), 457(b) and SIMPLE IRA plans for the benefit of these employees.
Increase the catch-up amount for individuals age 60 or over to $10,000. Currently, participants 50 or older can make catch-up contributions to their 401(k), 403(b) or 457(b) plans. The catch-up limit for 2021 is $6,500. The bills would raise the limit to $10,000 for participants 60 or older.
Increase the starting age for required minimum distributions (RMDs) to 75. The SECURE Act raised the age at which retirement plan distributions must begin from 70½ to 72. These bills would push off the starting age by three more years.
Enhance the Saver’s Credit. Currently, a tax credit of up to $1,000 is available to low and moderate income workers who contribute to IRAs or employer retirement plans. Both bills would increase the income limits, making more retirement savers eligible for the credit. The Neal-Brady bill would increase the credit amount to $1,500. Under the Portman-Cardin bill, even savers who owe no federal tax would be able to claim the credit.
Exempt individuals with balances under $100,000 from the RMD rules. Under both bills, individuals whose aggregate balances in IRAs and employer plans (other than defined benefit plans) did not exceed $100,000 would not be required to take distributions.
Permit qualified charitable distributions from qualified plans. Under current law, individuals 70½ or older can directly transfer tax-free up to $100,000 per year from an IRA to a 501(c)(3) charitable organization. The bills would expand this provision to include distributions from employer plans, including 401(k)s and 403(b)s.
Reduce the penalty for failing to take required minimum distributions. The bills would lower to 25% the current 50% excise tax for failing to take an RMD from a plan or IRA.
Enhance the new plan startup credit for small employers. The SECURE Act increased an existing tax credit to 50% of the costs of starting a plan to a maximum credit of $5,000 per year for three years for employers with 100 or fewer employees. Before this SECURE Act change, which became effective in 2020, the maximum credit was $500. The Neal-Brady bill would increase the credit to 100% for employers with 50 or fewer employees. The bill would also clarify that the credit is available for employers that join a multiple employer plan.
Provide tax credits for plan contributions made by small employers. Employers with up to 50 workers that establish a plan would be entitled to a credit for contributions made on behalf of their employees. The maximum credit per employee would be $1,000 in the first two years, $750 in the third, $500 in the fourth and $250 in the fifth. The credit amount would be phased out for employers with between 51 and 100 employees.
Require new plans to include auto enrollment and auto escalation. New 401(k), 403(b) and SIMPLE IRA plans would be required to automatically enroll employees at a starting rate of at least 3% of their pay and annually increase the rate by 1% until it reached 10%. Employees could opt out. Some exceptions would apply, including businesses with no more than 10 employees and organizations that have been in business for less than three years. Existing plans would be grandfathered.
Permit 403(b) pooled employer plans. The SECURE Act created a new type of multiple employer plan—the pooled employer plan (PEP), which allows unrelated employers to band together to participate in a single plan. The Neal-Brady bill would permit pooled plan providers to create 403(b) versions of PEPs.
Require long-term, part-time employees the option to join 401(k)s sooner. The SECURE Act will require employers to permit employees who work at least 500 hours in three consecutive 12-month periods to contribute to their 401(k) plans beginning in 2024. The bill would shorten the three-year requirement to two years.
Create a retirement savings “lost and found.” The bill would establish an online mechanism that would enable individuals to search for lost retirement accounts.
More to come
It’s likely that many of these provisions, along with additional retirement plan changes that have been proposed by other members of Congress, could be included in a comprehensive “SECURE 2.0” package. Stay tuned.