On June 20, 2022, the Senate Finance Committee released its proposed retirement bill called “The Enhancing American Retirement Now (EARN) Act.” On Wednesday, June 23, the Senate unanimously passed the bill. It contains many provisions of the House’s own bill, but others that were left off the Senate’s bill.
In the following, we’ll discuss the provisions of this bill, along with the differences between the two bills. With strong support on both sides of the aisle, we should have new retirement legislation by the end of the year. Of course, things may change, so be sure to stay tuned.
- The Senate’s version of retirement legislation passed unanimously
- The bill shares many provisions of the House’s bill passed earlier this year
- Once finalized, SECURE Act 2.0 should be made into law by the end of 2022
History
On March 29, the House overwhelmingly approved the bipartisan Securing a Strong Retirement Act by a vote of 414 to 5. The Act, also known as SECURE Act 2.0, contains some significant IRA and 401(k) changes, including a new RMD age, expanding and ‘Roth-ifying’ catch-up contributions, higher IRA catch-up contributions, and much more. SECURE Act 2.0 is almost twice as big as its predecessor.
The EARN Act and the Securing a Strong Retirement Act bills are expected to make up SECURE Act 2.0 and will likely become law some time in 2022.
EARN Act Provisions
Below is a summary of the key provisions of the EARN Act that were also featured in the House’s bill.
Indexing IRA Catch-Up Contribution Limit
Under current law, the limit on IRA contributions is increased by $1,000 (not indexed) for individuals who have reached the age 50. The bill would index such limit in the same manner as the regular IRA limit. In theory, the catch-up limit would increase as the regular IRA limit does currently.
Higher catch-up contribution for individuals who are ages 60-63
Under current law, employees who have attained age 50 are permitted to make catch-up contributions under a retirement plan in excess of the otherwise applicable limits. The limit on catch-up contributions for 2022 is $6,500, except in the case of SIMPLE plans for which the limit is $3,000. The bill would increase these limits to $10,000 and $5,000, respectively, for employees who are age 60-63 (the age range in the House bill is 62-64).
Allow first-year elective contributions to new 401(k) plans of sole proprietors or single member LLCs to be made by due date for tax return
Under current law, only employer profit sharing contributions can be made in a 401(k) plan that has been established in a later year. For example, if an employer set-up a Solo 401(k) plan in 2022 for the 2021 taxable year, current law only allows employer contributions to be made for the 2021 taxable year. This provision would allow a Solo 401(k) plan participant to make employee deferral contributions in 2022 for the 2021 taxable year.
Increase in RMD Beginning Age to 75 in 2032
Under current law, under the required minimum distribution (RMD) rules, participants are generally required to begin taking distributions from their retirement plan at age 72, increased from age 70 ½ for 2020. The bill would increase the RMD age from 72 to 75 in 2032. (The House bill would increase the RMD age from 72 to 73 in 2023, to 74 in 2030, and ultimately to 75 in 2033.)
Long-term part-time workers: three years to two years
Prior to the SECURE Act, employers generally could exclude certain part-time employees (i.e., employees who have not satisfied a requirement that they have 1,000 hours of service in a year) when providing a plan to their employees.
The SECURE Act generally required 401(k) plans (other than collectively bargained plans) to have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service. The bill reduces the three consecutive year requirement to two years. In addition, the bill clarifies that pre-2021 service is disregarded for vesting purposes, just as it is for eligibility purposes.
This is an important provision for many Solo 401(k) plans which could now be forced to adopt an ERISA 401(k) plan. Many small business owners, who have set up a plan for themselves, utilize part-time employees. The flexibility of the three-year rule will be diminished with this provision.
Allowing SIMPLE & SEP Contributions to be made on a Roth basis
Unlike 401(k), 403(b), and governmental 457(b) plans, SIMPLEs and SEPs are not permitted to offer a Roth option; instead, all contributions must be pretax. The bill would allow employers to permit employees to elect Roth treatment of both employer and employee contributions.
This is a really exciting provision that will offer flexibility to retirement savers. In addition, this provision reflects the House and Senate’s push to “rothify” retirement accounts.
Related: SEP IRA vs. Solo 401(k)
Retirement plan catch-up contributions must be made on a Roth basis
Under the bill, catch-up contributions for when one reaches the age of 50 must be made on a Roth basis under 401(k), 403(b), and governmental 457(b) plans. SIMPLEs and SEPs are exempted from this rule. This would go into effect for 2024, which is one year later than the House bill.
Retirement savings lost and found
Many people are unable to find and receive the benefits that they earned—often because the company they worked for moved, changed its name, or merged with a different company.
Registry The legislation would use data that employers are already required to report to the Treasury Department, as well as additional required data, to create a national online registry for retirement accounts at Treasury. (The House places the registry at DOL.)
Cash-out limit The bill would increase the cash-out limit from $5,000 to $6,000. (The House and RISE & SHINE increase the limit to $7,000.)
Transfers The bill requires transfers from plans to a Treasury Lost and Found Office of the benefits of unresponsive participants of up to $1,000. The bill also places duties on employers with respect to the location of such participants after the benefits have been transferred. (This is not in the House bill.)
Enhancement of the start-up credit
Current law offers a small business that adopts a new qualified plan a tax credit, which can apply for up to three years, equal to the lesser of 50% of the employer’s start-up costs, or as much as $5,000.
Under the bill, 50% would be increased to 75% in the case of employers with 25 or fewer employees. The House bill increases the 50% credit to 100% for employers with up to 50 employees. The House bill also includes a new type of start-up credit described in the section below regarding House proposals not included in either the Finance or HELP bills.
Matching and non-elective contributions permitted to be made on a Roth basis
Under the bill, employers may permit employees to elect for some or all of their vested matching and non-elective contributions to be treated as Roth contributions under a 401(k), 403(b), or governmental 457(b) plan. The House bill only did this with respect to matching contributions.
The following are important provisions that were in the House Bill, but did not make it into the Senate Bill:
Statute of Limitations
Under the bill, the statute of limitations for taxes for prohibited transactions, excess contributions, or required minimum distribution failures shall start as of the date that an income tax return is filed for the year in the violation occurred (or the date that such return would have been due in the case of a person not required to file a return). The bill addresses the current-law problem under which the statute of limitations could never start in the absence of the filing of a return regarding a violation that a taxpayer may not be aware of.
Treatment of IRA Prohibited Transaction
Under current law, if an IRA owner engages in a prohibited transaction, the IRA is disqualified. The bill limits such disqualification to the amount involved in the prohibited transaction.
This was a good provision that would have treated IRA prohibited transactions the same way as 401(k) plan prohibited transactions.
Conclusion
The House & Senate retirement bills (the EARN Act and the Securing a Strong Retirement Act) contain a number of highly advantageous provisions that will prove valuable for many retirement plan investors. The almost unanimous bi-partisan support for these bills highlights the inherent benefits the retirement system provides to Americans.
Of course, there are differences between the two bills, so there will still be talks before presenting a final version. The strong belief is that there will be new retirement legislation before years end. SECURE Act 2.0 should continue the effort of the first bill passed a short time ago.
