In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses new retirement bill that was just released by the Senate, the provisions inside it, and when we can expect a final bill.
Breaking News: New Senate Retirement Bill Released
Hey, everyone, Adam Bergman here, tax attorney and founder of IRA Financial, and on today’s Adam Talks, going to dissect the new Senate retirement bill, known as EARN, Enhancing American Retirement Now Act, released on June 22, 2022; well, it was actually marked up June 22, it was released June 20, just a few days ago. So, I wanted to spend today’s podcast going through some of the key provisions. It’s a lot like the SECURE Act 2.0 that was released by the House in March. And, we’ll go through some of the provisions. What is expected to happen is for the committee votes, there will be a determination either of what provisions will be kept, what will be modified, what will be removed, and then ultimately a bill, a retirement bill that includes the House incentive provisions; some, not all, of the House and some, not all of the Senate will be merged into a final bill that would be signed by the President.
This is another example of the power of the retirement system. This is the only area where there’s absolutely bipartisan support, almost unanimous votes on these bills, whether it’s in the House or the Senate. And this runs in contrast to the Build Back Better bill, which the President wasn’t able to pass in the fall of 2021; had a lot of very controversial retirement provisions, which I spent a lot of time discussing, and I think that was an example of failure because there was no consensus, there wasn’t cross party line discussions and building up consensus and I think that’s why it failed. Whereas, this particular bill, whether it’s the House version or the Senate version, work, was worked on by Democrats and Republicans together. That’s the key word, together. When you try to slam a bill down the other party’s throat, it generally doesn’t go very well. When you do things together, which is what we send our politicians to do in DC, is to negotiate and work with the other side to try to get the best policy for all Americans. Good things happen.
So, let me focus; it’s a long bill, a few hundred pages almost. So, I don’t want any of you guys to have to read it. I spent the last two days going through it. So, I’m going to kind of break down the key provisions, and this way, hopefully in the next ten or so minutes, you’ll know all the key provisions without having to read the 200 page bill in its entirety. It’s a monster, and it’s another example of what lawyers can do.
So, let’s start right away. So this is an interesting one. Treatment of student loan payments as elected deferrals. So under the bill, for purposes of nondiscrimination testing safe harbor rules, an employer will be permitted to make matching contributions in a 401(k) or SIMPLE IRA respect to qualified student loan payments. So, those amounts can be used to pay off student loans as a matching contribution, which is pretty cool.
Next thing is they’re going to allow for certain incentive if you make contributions to 401(k). Right now, you can’t really even offer like, $25 gift cards. Not even allowed to offer incentives. What they want to do is they want to be able to allow you to offer some de minimis incentives to help your employees save, which is great.
Another important one, very important one, indexing IRA catch-up contribution limits. So under current law, the limit, an IRA contribution is increased by $1,000; not index, okay, that is not indexed. Whereas, the bill with index such limits and make it far easier to go up past that $1,000 limit.
This is a really important one. So, anyone between 60 and 63 are going to be able to do catch-up contributions for 2020, well going forward, in a much higher percentage. So, for example, the limit on catch-up contributions in 2020 is $6,500. The bill would increase those to $10,000. Okay? And then for SIMPLE IRAs, $3,000, it would increase it to $5,000. So again, from 60 to 63, which is supposed to be like your prime saving years before retirement, you’re going to be able to go from $6500 to $10,000 as a catch-up in retirement plans, 401(k)s. So, another really good program.
They have a lot of 457 stuff, which I’m going to skip. This is another good one. They’re going to allow you to self-certify hardships; make it easier to prove you have a hardship. Also, will permit penalty-free withdrawals in the case of domestic abuse. So, you can get around any penalties if, God forbid, you’re in the situation of domestic abuse.
What else is important? So, it’s also going to increase the RMD age in 2032 to 75. So. SECURE Act 1.0 increased the RMD age from 70 1/2 to 72. This bill wants to increase it from 72 to 75 over the next ten years. This is the same as the House version. Another good thing, we’re all living longer, so why not have the ability to save longer?
Let’s see, what else did I like? They’re gonna reduce the 50% penalty tax. So failures for individuals to take the RMD, there’s a 50% excise tax. The bill reduced it to 25%. People are older, they forget about RMDs, and they get slapped with this 50% excise tax on the failure to take that RMD distribution, which is steep. So, they’re going to reduce it to 25%, which is better than nothing.
Okay, what else? They’re going to expand the IRA charitable distribution rule. So, now if you’re over a certain age, you can make distributions to a charity and exclude it up to $100,000 of income, kind of treat it as part of your RMD. The bill indexes $100,000 figure and expands it to allow for one time distributions to charities through gift annuities, remainder annuity trust of $50,000. You’ll be able to do that $100,000, over a certain age, but also like a one timer of $50 below that set age. That seems like what this provision is trying to do. So, another interesting benefit that I think is worth talking about.
This is a cool one. They’re going to allow you to self-correct inadvertent plan and IRA violations. So, it’s going to be a lot easier to correct screw-ups if you inadvertently do something wrong in an IRA or 401(k). You’re going to be able to kind of fix that much easier than it is now.
They’re going to let it be easier and offer incentive for employers to join MEPs. Multiple employer plans, which allows multiple employers to be part of one plan, supposedly will reduce costs for the employer. So, they want to make it easier for companies to join MEPs, which is obviously pretty interesting.
What else? This is interesting for family attribution rules, I noted this down, where two or more companies must be treated as one company under current law, certain ownership by family members attributed to other family members. The bill reforms these attribution rules by disregarding community property laws. Okay, so it’s going to make it, the definition of who’s married, I guess, more limited.
What else? Repayments of qualified birth or adoption distributions. So current law does not limit the period during which a qualified birth or adoption distribution may be repaid. So, this bill limits the period to three years to the day. So again, something I thought was kind of interesting.
This is a very important one. They’re going to let SIMPLEs and SEPs do Roth contributions. So, this is also a provision that was in the House bill and basically, it’s going to allow employers to permit employees to elect Roth treatment on SEP and SIMPLEs, which now is not allowed. Right now, all you can do is pretax.
Also, retirement plan catch-up contribution must be made on a Roth basis. So, under the bill, the special catch-up contributions will have to be made in Roth. And this is obviously SIMPLE and SEPs are exempted. This would start in 2024. Again, this is pretty controversial because if you’re doing catch-up contributions in a 401(k), say the $6,500, right now, it could be pretax or Roth; this provision, and it’s also in the House, will make it required to be Roth. Why? The IRS wants to reduce the ability to take taxable deductions; they still want to let you put money in your retirement plan, which is nice, but they don’t want to give you that deduction because obviously that reduces your taxable income and they want to keep your taxable income higher so they could have more taxable revenue. So, this provision, which is controversial because it’s going to force people to do Roth, and again, the theme I’ve talked about this repeatedly, overall theme the last seven to ten years is “Rothification.” House and Senate have been pushing more and more for retirement plans to offer Roth and ultimately maybe even only offer Roth options. Why? You would think that makes no sense because in the next 20,30, 40, 50 years, when you hit your RMD age, it’s all going to be tax free, which does not bode well for Treasury. The issue is governments today don’t care about what’s going to happen in 30 or 40 or 50 years. That’s someone else’s issue. By Rothification, they will maintain a higher level or higher tax base, which will provide more tax revenue, which will let whoever is in government pay for more social programs, military, roads, infrastructure, whatever the case may be. So, it helps now, hurts later. Short-term thinking versus long-term thinking. But, that’s the way governments work. So, we’ll see. Obviously, in 30, 40 years, government could just change the rules again and just say, you know what? Forget Roth, you have to pay tax when you pull the money out. So, who knows, right? Governments do this stuff all the time. I’ve used the example before 1982, Social Security wasn’t taxable, now it is. So, governments can change the rules anytime they want.
The next thing, they want to increase the saver’s credit for certain income earners who make contributions to retirement plan. So, that’s pretty cool.
What’s next? What did I mark up that I thought was good? Okay, no penalty tax on distributions of income and excess of IRA contribution. So right now there’s 10% early distribution tax, not applied distributions on earnings, a non-deducted excess IRA contribution. So, if you screw up and take an excess IRA contribution and it’s after tax, you’re not going to have to pay the penalty.
Portability, this is pretty interesting. They’re going to allow direct rollovers of eligible employer sponsored plans to another IRA. Okay? So, this is 2025, they’re basically saying, hey, Treasury, you need to come up with better rules for rollovers and IRAs. I’m not sure what that means. All they’re doing is saying no later than January 1, 2025, they need to develop sample forms for this, for direct rollovers and transfers, which whatever, like IRA Financial, we have our own forms, I’m not sure it’s a big issue, but it’s in the bill.
What else did I think was interesting? They’re going to offer more credits if you want to adopt retirement plans, 401(k) plans, the credit will be increased just like the House bill. Again, all about incentivizing people, especially employers, to have 401(k) plans.
What’s next? A lot of SIMPLE/SEP stuff besides the Roth stuff. Let’s talk about some of the House stuff that’s not in the Senate bill, okay? The House had an automatic enrollment, so they want to require automatic enrollment and new retirement plans, which a lot of people in history shows, numbers show that if you automatically enroll people, they’ll tend to save more. The Senate bill does not have an automatic enrollment for retirement plans, a forced one.
The House bill has a higher credit limit than the Senate bill for setting up a 401(k). What else? Treatment of IRA prohibited transactions. So, under current law IRA owner engaged in a prohibited transaction, the IRA owner is disqualified. The bill limits such disqualification to the amount involved in the prohibited transaction. This is not in the Senate bill. The House bill wanted to treat IRA PTs like 401(k), where if you screw up, and do an IRA PT, it only impacts that particular transaction, not the whole IRA. That is not in the Senate Finance Bill.
Also, yeah, that’s pretty much it. So, just to summarize, the big stuff here, and most of the big stuff is the same as the House bill. The indexing IRA catch-up contribution limits, increase to the RMD age from 72 to 75, the higher retirement contribution catch-up from 60 to 63. The Roth ability for SIMPLE and SEP plans, and probably the most controversial is requiring Roths for catch-up contributions for retirement plans, for 401(k)s.
So, that’s probably the big stuff, and again, I expect most of the stuff to get passed, become law. There’s bipartisan support, and on its whole, it’s very helpful. It’s good stuff. This is good legislation that will help all of us save, be better savers, make it easier for us to save, especially on the loan stuff. They’re really pushing to allow these contributions, employer matching contributions, to be used to pay student loans without having to take a taxable distribution to use it. Honestly, I give both Democrats and Republicans a lot of credit for working together. Both the House and Senate Finance Bills are good bills. Most of them are the same, other than the few provisions that were different, or not in the Senate bill, but was in the House bill. Good stuff, right?
Increasing the RMD, allowing Roth options, allowing the ability to do super catch-ups from 60 to 63. Those are all good stuff, right? I’m not crazy about forcing people to do Roth for catch-up, but yeah, it’s not a horrible situation. What else did I like? They’re really trying to help portability. They want you to also be able to roll over Roth IRA to a 401(k); that’s another provision that’s in the House bill that potentially could also become law.
So again, on its whole, really positive stuff. Good stuff here. I wanted to kind of share it with you; I tried to really focus on the key provisions. There’s lots and lots and lots of provisions. Like I said, this bill is so damn long, I just couldn’t let you guys have to go through it.
So, there you go. Those are the key provisions. I’m going to probably do a blog on this and just jot it all down. So you have it. You can kind of focus on the provisions that you’re interested in mostly, but they really want to try to make it easier. That’s the bottom line; whether it’s portability, getting more guidance on rollovers, letting you save longer, letting you have more flexibility, whether it’s through Roth contributions or the ability to offer retirement plans and make it easier; really popular. So, there’s also one last thing that I didn’t mention in the House bill that I also like is they want to have a retirement savings lost and found, where there’s like a database for people that may have retirement plans at former employers, kind of lose track of it, don’t even know they have it and now they can kind of try to find it. I thought that was pretty cool.
And that’s it; those are the big stuff. Really appreciate you guys spending some time with me. As I mentioned, there’s a lot to digest in the last two days to kind of go through it. So, I hope I was able to kind of just focus on the key provisions. There’s a lot of other stuff that probably won’t apply to most to you. A lot on like 457 government plans, some stuff on public safety officers, like military, firefighters, things like that. Also a bunch of nonprofit, like 403 stuff, disaster relief, that I didn’t want to spend a lot of time on. Really wanted to just focus on the IRAs and some of the stuff for Solo 401(k)s.
So, there you go. I appreciate you guys spending some time with me today. Subscribe if you haven’t. It’s a weekly podcast. It drops every Wednesday. If you miss it, you can always watch it on YouTube at your convenience. And really appreciate you guys watching, and if you’re listening, thanks again. That’s it. Hope wasn’t too much, but it’s good stuff.
It’s again, it gives you some hope that the folks in Washington can actually get stuff done. And again, just proves my point that the retirement systems awesome. It works, because it’s the only system, the only set of rules, where they’re 100% bipartisan support. Maybe not 100%, probably 96%, but it works. Whether it’s Democrat, independent, Republican; people understand the retirement system; makes sense, it’s based off math. You make more and able to save more when your retirement funds are not subject to tax. It’s the system that takes advantage of the power of deferral, power of compounding returns. Albert Einstein, I keep saying he coined it, not me, compounding returns is the 8th wonder of the world, and the retirement system is the best way to explore that phenomenon.
So, thanks again for listening, watching, and have a great rest of your week. Take care.
Keep Listening: Episode 344: Shocking New Creditor & Asset Protection Case
