The Establishing Every Community for Retirement Enhancement Act 2019 (the SECURE Act) brought sweeping changes affecting defined contribution and defined benefit plan sponsors, pension plan service providers and Individual Retirement Account and Annuity (IRA) providers. While many thought the SECURE Act had done much to expand retirement savings opportunities and promote retirement income security, some thought it could have gone further. There are currently several retirement bills pending reconciliation in Congress.
On June 17, 2022, the U.S. Senate Finance Committee released a summary of the EARN Act, which the committee approved on June 22, 2022. The EARN Act proposes to expand access to retirement plans, increase the potential retirement savings and simplify plan administration. Several of his proposals are similar to other recently proposed retirement bills, including the Securing a Strong Retirement Act of 2021, which passed the U.S. House of Representatives with overwhelming bipartisan support on 29 March 2022, and the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments Act for the Nest Egg Act of 2022 (the RISE & SHINE Act), which provides additional protections for retirement savings, and was unanimously approved by the US Senate Committee on Health, Education, Labor and Pensions (HELP) on June 14, 2022.
Although there appears to be bipartisan support for many EARN Act proposals, before they can be considered by Congress, there will need to be some reconciliation between the EARN Act and other retirement bills. The timing of this process is unclear, but many hope the final version of the new pension legislation, dubbed SECURE Act 2.0, will pass later this year.
A few of the key EARN provisions affecting large plan sponsors and IRA providers are summarized below.
Changes to Expand Retirement Plan Access and Increase Retirement Savings
- Adds an alternative method to satisfy non-discrimination tests for 401(k) plans that automatically enroll employees; the default contributions would be higher under the new method.
- Under current law, the default contribution for 401(k) plans that automatically enroll employees must be no less than 3% in the first year of enrollment and increases must be no less than an additional 1% per year. year through year 4 and beyond, in which case the default should be at least 6%. The employer’s mandatory matching contributions are either a matching contribution equal to 100% of the first 1% of deferred compensation and 50% of the next 5% deferred, or a matching contribution of 3% of compensation (even if no deferral is made by the employee ).
- The EARN Act would require default contributions to be no less than 6% in year one and increase by 1% per year until year five and beyond, 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. This provision would be effective after 2023.
- Expands 401(k) plan access to more long-term part-time workers. Currently, an employer with a 401(k) plan must allow employees with at least 500 hours of service per year for three consecutive years to participate in the plan. The EARN Act would reduce the requirement from three years to two years, starting in 2022.
- Expands retirement savings opportunities for employees making student loan repayments. The EARN Act would allow employers to treat student loan payments as optional deferrals for the purposes of making matching contributions under 401(k) and other tax-advantaged retirement plans, beginning in 2023.
- Increases the catch-up limit for plan members at age 60. Currently, participants age 50 and older can make additional annual contributions of $6,500 to 401(k) plans (or an additional $3,000 to SIMPLE plans). The EARN Act would increase the catch-up limit so that, beginning in 2023, participants could elect to contribute an additional $10,000 (indexed) per year from age 60 to 63 ($5,000 for SIMPLE plans).
- Indexes the IRA catch-up limit. Currently, an IRA owner age 50 and older can contribute an additional $1,000 per year to their Traditional and Roth IRAs. The EARN Act would index the catch-up limit, effective for years beginning after the date of enactment.
Changes to expand access to retirement savings in certain situations
- Adds penalty-free withdrawals to cover emergency expenses. The EARN Act would allow 401(k) plan participants and IRA owners to receive an advance distribution of up to $1,000 per year to cover unforeseeable or immediate financial needs related to personal or family emergency expenses. The distribution would not be subject to the 10% early distribution penalty. The individual could repay the distribution within three years and no further emergency distributions would be permitted during the three-year repayment period unless the amount is repaid. This change would be effective after 2023.
- Adds penalty-free withdrawals for survivors of domestic violence. The EARN Act would allow 401(k) plan participants and IRA owners who are survivors of domestic violence to receive advance distributions of up to $10,000 or 50% of the account balance without being subject to the 10% early distribution penalty. The individual could repay the distribution to a tax-advantaged retirement account. This change would come into effect after the date of proclamation.
- Adds penalty-free withdrawals for terminally ill people. The EARN Act would allow 401(k) plan participants and terminal IRA owners to receive early distributions without being subject to the 10% early distribution penalty. This change would come into effect after the date of proclamation.
- Added permanent rules for the use of federally declared disaster retirement funds. The EARN Act would establish permanent rules that would, among other things, allow plan participants and IRA owners affected by federally declared disasters to receive a distribution of up to $22,000 without being subject to the penalty of 10% early distribution. Distributions would be counted as gross income over three years and could be returned to a tax-advantaged retirement account. This change would be effective for disasters occurring on or after January 26, 2021.
- Allows pension plans to make penalty-free distributions to pay for certain long-term care insurance contracts. The EARN Act would allow plan participants and IRA owners to receive a distribution of up to $2,500 per year to pay premiums for certain long-term care insurance policies that provide high-quality coverage without being subject to to the additional 10% tax on early distributions. . The change would come into effect three years after the date of promulgation.
Key changes to simplify plan administration
- Allows employers to rely on an employee’s certification that the conditions for a hardship allocation have been met.
- Require the Treasury to simplify and standardize the rollover process by releasing sample forms for direct rollovers that can be used by both the incoming and outgoing pension plan or IRA.
- Amends the Employee Plan Compliance Resolution System (EPCRS) to allow self-correction of inadvertent failures by a plan provided the failure in question is not egregious.
- Extends the EPCRS to cover certain failures with respect to IRAs.
- Enables pension plan service providers to provide employer pension plans with automatic porting services to transfer participants’ account balances that are distributable from a default IRA to a participant’s new employer’s pension plan .
- Allows employer plans not to request refunds of overpayments and clarifies that an erroneous overpayment for which no refund is requested is eligible for transfer to another plan or IRA.
- Requires the Treasury to create a “Lost and Found Retirement Savings” database that would provide contact details for employer pension plans in an effort to help participants and beneficiaries recover lost plan benefits.
There are a number of other changes in the EARN Act that would impact small employer plans, required minimum distribution rules, 403(b) plans, and other aspects of retirement plans and IRAs. Look for more blog posts on other key aspects of SECURE Act 2.0 in the near future.