The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) made sweeping changes affecting sponsors of defined contribution and defined benefit plans, retirement plan service providers, and providers of individual retirement accounts and annuities (IRAs). While many believed the SECURE Act went a long way toward expanding retirement savings opportunities and promoting retirement income security, some believed it could have gone further. There are currently several proposed retirement acts pending reconciliation in Congress.
On June 17, 2022, the US Senate Finance Committee released a summary of the EARN Act, which the Committee approved on June 22, 2022. The EARN Act proposes to expand retirement plan access, increase potential retirement savings, and simplify plan administration. Several of its proposals are similar to other recently proposed retirement legislation, including the Securing a Strong Retirement Act of 2021, which passed the US House of Representatives with overwhelming bipartisan support on March 29, 2022, and the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments 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 Health, Education, Labor and Pensions (HELP) Committee on June 14, 2022.
While there appears to be bipartisan support for many of the EARN Act’s proposals, before being considered by Congress, there will need to be a reconciliation between the EARN Act and the other proposed retirement legislation. The timing of this process is not clear, but many are hopeful that the final version of the new retirement legislation, dubbed SECURE Act 2.0, will be passed later this year.
A few of the EARN Act’s key provisions affecting larger plan sponsors and IRA providers are summarized below.
Changes to Expand Retirement Plan Access and Increase Retirement Savings
- Adds an alternative method of satisfying nondiscrimination testing for 401(k) plans that automatically enroll employees; 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 lower than 3% in the first year of enrollment and increases must be no lower than an additional 1% per year until the fourth and later years, in which case the default must be at least 6%. The mandatory employer contributions are either a matching contribution equal to 100% of the first 1% of compensation deferred and 50% of the next 5% deferred, or an employer contribution of 3% of compensation (even if no deferrals are made by the employee).
- The EARN Act would require that default contributions be no lower than 6% in the first year, and increase by 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. 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 permit employees with at least 500 hours of service a year in three consecutive years to participate in the plan. The EARN Act would reduce the three-year requirement to two years, effective after 2022.
- Expands retirement savings opportunities to employees making student loan payments. The EARN Act would allow employers to treat student loan payments as elective deferrals for purposes of making matching contributions under 401(k) and other tax-preferred retirement plans, effective after 2023.
- Increases catch-up limit for plan participants at age 60. Currently, participants who are age 50 and older may 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, effective after 2023, participants could elect to contribute an additional $10,000 (indexed) annually beginning between ages 60 and 63 ($5,000 for SIMPLE plans).
- Indexes IRA catch-up limit. Currently, an IRA owner aged 50 and older may make an additional $1,000 contribution annually to his or her 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 for Certain Situations
- Adds penalty-free withdrawals to cover emergency expenses. The EARN Act would allow 401(k) plan participants and IRA owners to take an early distribution of up to $1,000 per year to cover unforeseeable or immediate financial needs relating 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 other emergency distribution would be permissible during the three-year repayment period unless the amount were repaid. This change would be effective after 2023.
- Adds penalty-free withdrawals for domestic abuse survivors. The EARN Act would allow 401(k) plan participants and IRA owners who are domestic abuse survivors to take early distributions of up to the lesser of $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-preferred retirement account. This change would be effective after the date of enactment.
- Adds penalty-free withdrawals for terminally ill individuals. The EARN Act would allow 401(k) plan participants and IRA owners who are terminally ill to take early distributions without being subject to the 10% early distribution penalty. This change would be effective after the date of enactment.
- Addition of permanent rules for the use of retirement funds in the case of federally declared disasters. The EARN Act would establish permanent rules that would, among other things, allow plan participants and IRA owners affected by federally declared disasters to take a distribution of up to $22,000 without being subject to the 10% early distribution penalty. The distributions would be taken into account as gross income over three years and could be repaid to a tax preferred retirement account. This change would be effective for disasters occurring on or after January 26, 2021.
- Allows retirement plans to make penalty-free distributions to pay certain long-term care insurance contracts. The EARN Act would allow plan participants and IRA owners to take a distribution of up to $2,500 per year to pay premiums for certain long-term care insurance contracts that provide for high-quality coverage without being subject to the additional 10% tax on early distributions. The change would be effective three years after date of enactment.
Key Changes to Simplify Plan Administration
- Allows employers to rely on an employee’s certification that the conditions for a hardship distribution are met.
- Requires Treasury to simplify and standardize the rollover process by issuing sample forms for direct rollovers that may be used by both the incoming and the outgoing retirement plan or IRA.
- Modifies the Employee Plans Compliance Resolution System (EPCRS) to permit self-correction of inadvertent failures by a plan provided that the failure at issue is not egregious.
- Expands the EPCRS to cover certain failures with respect to IRAs.
- Allows retirement plan service providers to provide employer retirement plans with automatic portability services to transfer participant account balances that are distributable from a default IRA to a participant’s new employer’s retirement plan.
- Allows employer plans to not seek repayment of overpayments and clarifies that a mistaken overpayment for which no repayment is sought is eligible for rollover to another plan or IRA.
- Requires Treasury to create a “Retirement Savings Lost and Found” database that would provide contact information for employer retirement plans for the purpose of assisting participants and beneficiaries in recovering lost plan benefits.
There are a number of other changes in the EARN Act that would impact smaller 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.