The Senate Finance Committee on June 17 released the Enhancing American Retirement Now (EARN) Act—its counterpart to the House-passed SECURE 2.0—a massive piece of legislation that includes a number of key provisions supported by the American Retirement Association.
In fact, the committee has scheduled a June 22 markup to consider the EARN Act, and with its release—and the Senate Health, Education, Labor and Pensions (HELP) Committee’s recent approval of the “Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg” (RISE & SHINE) Act (S. 4353) the same week—the contours of what a final year-end legislative package might look like are coming more into focus.
"ARA supports the EARN Act which includes a number of provisions to increase retirement plan coverage and make it easier for working Americans to save," stated 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 the other Senate Finance Committee members for keeping this process bipartisan. It’s great to see that helping Americans achieve a comfortable retirement is something everyone can agree on."
Among the nearly 70 provisions contained in the nearly $40 billion EARN Act are several ARA-supported proposals, including:
- the recently introduced Starter K legislation;
- an enhanced Saver’s match;
- enhanced tax credits for the cost of new plans (similar provision included in SECURE 2.0);
- a new stretch match 401(k) safe harbor;
- reform of family attribution rules (similar provision included in SECURE 2.0);
- top-heavy relief for excludable employees (similar provision included in SECURE 2.0);
- allowing 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
- providing permanent rules relating to the use of retirement funds in the case of disaster.
Starter 401(k) Plans
A key component of the legislation that seeks to help close the nation’s retirement savings gap is establishment of new “starter” DC plans. Under this ARA-backed provision, an employer which does not currently sponsor a retirement plan would be permitted to offer a starter 401(k) plan (or safe harbor 403(b) plan), which would generally require that all employees be default enrolled in the plan at a 3% to 15% of compensation deferral rate. The limit on 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 beginning at age 50. This provision would be effective after 2023.
Enhanced Saver’s Match
The EARN Act would also modify the existing Saver’s Credit with respect to IRA and retirement plan contributions by changing it from a credit paid in cash as part of a tax refund to a government matching contribution that must be deposited into a taxpayer’s IRA or retirement plan. The credit would be 50% of IRA or retirement plan contribution up to $2,000 per individual. The credit rate would phase out between $41,000 and $71,000 in the case of taxpayers filing a joint return ($20,500 to $35,500 for single taxpayers and married filing separate; $30,750 to $53,250 for head of household filers). The provision would be effective for years after 2026.
Stretch Match 401(k) Safe Harbor
As a proposal that was included in the Portman-Cardin bill, the provision would provide an alternative method of satisfying nondiscrimination testing for 401(k) plans that default enrolls employees into elective deferral contributions and makes certain mandatory employer contributions. The provision would require default contributions must be no lower than 6% in the first year and increase 1% per year until the fifth and later 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 or fewer workers), the employer would be eligible for a tax credit with respect to the modified safe harbor requirements. As such, a small employer that adopts a plan that satisfies 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. However, no credit would be available with respect to matching contributions for highly compensated employees and matching contributions eligible for the credit would be limited to the first 2% of an employee’s deferral contributions and only with respect to an employee’s first five years of participation. The provision would be effective after 2023.
EARN would also:
- Permit a retirement plan service provider to provide employer plans with automatic portability services and provide a $500 credit to small employers (100 or fewer employees) that adopt an automatic portability arrangement.
- Require Treasury to simplify and standardize the rollover process by issuing sample forms for direct rollovers that may be used by both the incoming and outgoing retirement plan or IRA.
- Eliminate the 25% threshold of a participant’s account balance imposed on QLACs (qualifying longevity annuity contracts), increasing the dollar limit to $200,000 (indexed) (from $135,000), and clarify that survivor benefits may be paid in the case of divorce.
- Clarify that a tax-preferred employer plan does not violate the tax qualification rules if the plan does not seek repayment or if the plan is amended to account for the overpayments.
- Reform family attribution rules (a provision supported by the ARA).
In addition to the provisions highlighted above, the EARN Act contains several other provisions that are substantially similar to the House’s SECURE 2.0 legislation passed in March, including:
- allowing 403(b) plans to participate in multiple employer plans (MEPs) and pooled employer plans (PEPs);
- treating student loan payments as elective deferrals for purposes of matching contributions;
- allowing higher catch-up limits 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];
- waiving the 10% additional tax that applies to early distributions from tax-preferred retirement accounts (e.g., 401(k) plans and IRAs) in the case of eligible distributions to domestic abuse victims;
- permiting a retirement plan to rely on an employee’s certification that the conditions for a hardship distribution are satisfied, and providing regulatory authority for exceptions to this reliance;
- increasing the age for required beginning date for mandatory distributions;
- removing required minimum distribution barriers for life annuities;
- implementing a retirement savings lost and found database;
- expanding the Employee Plans Compliance Resolution System (EPCRS); and
- implementing a safe harbor for corrections of employee elective deferral failures.
The cost of the roughly $38 billion bill would be offset by several provisions, including one specifying that elective deferrals generally would be limited to the regular contribution limit, such that a section 401(a) qualified plan, 403(b) plan or governmental 457(b) plan that permits an eligible participant to make catch-up contributions must require such catch-up contributions to be designated Roth contributions. This proposal alone is estimated to raise $25 billion by the Joint Tax Committee.
Note that the provisions highlighted above represent just a snapshot of the various changes included in the Finance Committee’s EARN Act.
Following the Finance Committee’s presumed approval of its bill on June 22, it is expected that the two bills will be merged during consideration by the full Senate. And then once the Senate approves its retirement security legislation, that bill will then have to be reconciled with the House-passed SECURE 2.0 before final passage—all of which is anticipated in the coming months.
Of course, as this bill moves through the legislative process, it is subject to change.