The Senate Finance Committee unanimously approved its SECURE 2.0 bill, the Enhancing American Retirement Now (EARN) Act on June 22, kicking off an effort to meld the legislation and two other bipartisan bills into a final package that could become law by the end of the year. The EARN Act overlaps with a widely-supported SECURE 2.0 bill approved by the Senate Health, Education, Labor and Pensions (HELP) panel earlier this month (S 4353) and with a measure that passed the House in March (HR 2954). All of the bills build on the suite of retirement reforms enacted in the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (Div. O of Pub. L No. 116-94). This GRIST highlights key provisions in the EARN Act of interest to employers.
Finance members approved a version of the EARN Act that was not drafted in legislative language, instead offering a summary and Joint Committee on Taxation (JCT) analysis of the provisions and edits, as is customary for tax measures in that committee. It draws on elements of legislation introduced last year by Senators Ben Cardin, D-MD, and Rob Portman, R-OH, (S 1770) and from other bipartisan bills from committee members.
The EARN Act also incorporates some provisions similar to those in the HELP committee bill, which makes changes to ERISA but not the tax code, and in the House bill, which includes both ERISA and tax code changes. All of the bills aim to expand retirement plan coverage, boost savings, increase lifetime income opportunities and ease plan administration.
Key differences in the EARN Act include proposals for a major expansion of the Saver’s Credit that would make the credit payable only to workplace plans and IRAs, a new automatic enrollment safe harbor, and an array of incentives for small employers to offer savings plans. The EARN Act drops a House proposal to require most new 401(k) and 403(b) plans to adopt automatic enrollment. Instead, it offers a tax credit to small businesses that adopt auto enrollment in their plans.
The EARN Act raises revenue to pay for its reforms the same way the House bill does, however, directing or encouraging more retirement savings in the form of post-tax Roth contributions. These provisions would raise more than $39 billion in federal revenue within the 10-year budget window because much of the Roth tax break for distributions would occur beyond the window, according to the JCT.
Congress is already working to reconcile the three bills into a package that the president could sign later this year. Lawmakers hope to attach a final measure to the tax vehicle during the lame-duck period following the November elections to wrap up a range of unfinished business and extend popular, expired pieces of the tax code.
The EARN Act would let sponsors of 401(k), 403(b), governmental 457(b) and savings incentive match plans for employees (SIMPLE IRA) plans match employees’ qualifying student loan payments as if the payments were salary-reduction contributions. The change would apply to plan years starting after 2023. Employers offering the benefit would have to make it available to all employees eligible to receive matching contributions on salary deferrals (and vice versa). The match rate and vesting schedules for both salary deferrals and student loan payments would have to be the same. The benefit would apply only to repayments of student loan debt incurred by a participant (or their spouse or dependent) for higher education, and employers could rely on an annual employee certification that the loan repayments were made.
The bill would modify the minimum coverage and nondiscrimination rules as follows:
The bill directs the Treasury Secretary to issue implementing regulations, including permitting student loan matching contributions to be made at a different frequency than matching contributions on salary deferrals.
The bill aims to increase the use of automatic-enrollment designs in defined contribution (DC) plans for plan years beginning in 2024 through a new secure deferral arrangement. This new auto-enrollment safe harbor design would have higher minimum deferral and matching contribution rates than the existing qualified automatic contribution arrangement (QACA) safe harbor. Eligible small employers who offer the secure deferral arrangement feature would be eligible for a tax credit.
The EARN Act would allow some part-time workers to participate in workplace retirement plans a year earlier than current eligibility rules require. Sponsors of noncollectively bargained 401(k) plans would have to let part-time workers voluntarily contribute to the plan if they have completed at least 500 hours of service in two consecutive years (reduced from three) and have attained age 21. Pre-2021 service would not be counted, but some part-time employees could still be eligible as early as the 2023 plan year. The bill would also clarify that pre-2021 service by these part-time employees could be excluded for vesting purposes in any employer contributions.
Beginning in 2025, 401(k), 403(b) and governmental 457(b) plans could allow larger catch-up contributions of up to $10,000 for individuals who will be at least age 60 but less than age 63 by the end of the tax year. The maximum catch-up contribution for SIMPLE plans would increase to $5,000. These increased catch-up contribution limits (and the current $1,000 limit for IRAs) would undergo annual cost-of-living increases.
The bill would make a number of changes to Internal Revenue Code (IRC) Section 401(a)(9) rules for required minimum distributions (RMDs):
The bill would make the following changes to DC plan distribution rules:
The bill includes several provisions to help retirees make their savings last throughout retirement.
QLACs let employees use a portion of their retirement savings to purchase an annuity starting as late as age 85 without violating RMD rules. The bill directs Treasury to amend its regulations on QLACs to provide more flexibility.
To remove what some retirees consider barriers to purchasing commercial annuities, the bill would allow the following:
The bill would significantly expand the Self-Correction Program (SCP) under IRS’s Employee Plans Compliance Resolution System (EPCRS) and add a new safe harbor correction for elective deferral failures:
The bill would give retirement plan fiduciaries the latitude to decide not to recoup certain inadvertent benefit overpayments. Plan sponsors would also have the ability to amend the plan to increase past or future benefits for affected participants to adjust for inadvertent benefit overpayments. Participants and beneficiaries who rollover overpayments to an IRA or another plan would not have to unwind their rollovers if the plan decides to forgo recoupment.
Several provisions would simplify reporting and disclosure requirements:
Several of the bill’s provisions relate specifically to 403(b) plans:
The bill would require the Treasury Department to establish an Office of the Lost and Found to administer an online searchable database of information about retirement benefits. Plan administrators would have to provide Treasury with information about current and former participants to enable the construction and operation of the database — called the Retirement Savings Lost and Found. Individuals who had been a retirement plan participant or beneficiary would be able to search the database to get contact information for the plan’s administrator.
Treasury also would be required to hold mandatory distributions of non-responsive participants’ account balances of $1,000 or less. Employer plans would have to transfer these balances to the Office of the Lost and Found when participants fail to make an election or cash the distribution check within six months. An account balance held by Treasury would be treated as being held in an IRA and would be credited with interest. The Office of Lost and Found would have to conduct periodic searches to attempt to locate these non-responsive participants.
The bill contains a few targeted provisions for defined benefit (DB) pension plan sponsors:
Some provisions will be of special interest to small employers:
Other miscellaneous provisions that might be of interest to employers include:
The EARN Act revives an earlier proposal from Finance Committee Chair Ron Wyden, D-OR, to replace the currently nonrefundable saver’s credit with a government matching contribution deposited directly into eligible individuals’ workplace savings plans or IRAs. Beginning in 2027, a pretax matching contribution of 50% would be available on eligible individuals’ first $2,000 of retirement savings per year. The 50% rate would be phased out between $41,000 and $71,000 for 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). Government matching contributions would not count against any applicable limits on contributions and would not count for purposes of nondiscrimination testing.