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On June 17, 2022, Senate Finance Committee Chair Ron Wyden (D-OR) released an outline of the bipartisan Enhancing American Retirement Now (EARN) Act. The Committee is expected to take up this legislation beginning the week of June 20. The EARN Act, together with the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Act (the RISE & SHINE Act), recently reported out of the Senate Health, Education, Labor, and Pensions (HELP) Committee, and the Securing a Strong Retirement Act of 2022 (SECURE 2.0) approved by the House on March 29, 2022 by a nearly unanimous (414-5) vote, represent the “set” of the bipartisan retirement policy reform proposals currently being considered by the current Congress.
In what follows we briefly discuss proposals included in the outline. We conclude with a very brief note about the prospect for retirement legislation this year.
EARN Act proposals
New 401(k) ADP testing safe harbor
The EARN Act would add a new 401(k) actual deferral percentage (ADP) testing auto-enrollment/escalation safe harbor. To qualify for this safe harbor, the plan would have to default employees into saving (initially) at least 6%, increasing to 10% in the fifth and later years. Sponsors would have to match 100% of the first 2% of contributions, 50% of the next 4%, and then 20% of the next 4%.
Small employers (100 or fewer employees) adopting this safe harbor would, for the first five years, get a tax credit equal to the required matching contributions on the first 2% of contributions made by non-highly compensated employees.
Revision of/increase in the Saver’s Credit
The Saver’s Credit currently provides for a non-refundable tax credit equal to up to 50 percent of the first $2,000 of contributions by certain low-income individuals to a 401(k) plan, IRA, or certain other retirement programs. The EARN Act would make the credit (in effect) refundable and require that, instead of being credited directly to the taxpayer, it be paid to the taxpayer’s plan or IRA.
Retirement Savings Lost and Found
The EARN Act would create a database providing participants employer/retirement plan contact information that would be maintained by Treasury. The database would assist participants recovering “lost” plan benefits. Retirement plan balances under $1,000 that an employer was unable to distribute to the participant would be held by Treasury in an account that would be treated like an IRA.
Starter 401(k) plans
The EARN Act would allow employers that do not have a retirement plan to establish a “starter 401(k) plan.” Under such a plan, employees would be auto-enrolled at a rate of 3%-15% of compensation; the limit on participant contributions would be the same as those on IRA contributions.
Limit IRS mortality improvement assumption to 0.78%
The issue of the mortality improvement assumption used for defined benefit plan valuations has been a matter of controversy since IRS finalized regulations in 2017, with critics claiming that the scale adopted in those regulations was much too aggressive (that is, that it assumed unreasonably high rates of mortality improvement). IRS has generally followed/used the Society of Actuaries’ mortality improvement scale, most recently in new regulations proposed in April 2022. The SOA’s most recent mortality improvement scale MP-2021 calls for a long-term rate of mortality improvement of a “flat 1.35% rate to age 62, decreasing linearly to 1.10% at age 80, further decreasing linearly to 0.40% at age 95, and then decreasing linearly to 0.00% at age 115.” The EARN Act proposal provides that a plan would not be required to apply an improvement scale for purposes of the minimum funding rules that is greater than 0.78%. To connect these dots: the change proposed in the EARN Act would (on balance) reduce DB liability valuations.
Changes related to RMD rules
With respect to the Internal Revenue Code’s required minimum distribution (RMD) rules, the bill includes proposals that would:
Increase the mandatory commencement age from (currently) 72 to (proposed) 75, for calendar years after 2031.
Eliminate the (current) limitation on qualified longevity annuity contracts (QLACs) to 25 percent of an individual’s account balance, increase the dollar limit on QLACs from $135,000 to $200,000, and clarify that survivor benefits may be paid in the case of divorce.
Allow more flexible annuity terms (e.g., allowing certain post commencement lump sum payments) and the coordination (for RMD purposes) of annuity payments and account-based distributions.
Reduce the excise tax on failure to make an RMD from 50% to 25%.
Provide that the RMD rules would not apply before death to qualified plan Roth accounts.
Allow a surviving spouse to elect treatment as the deceased employee under RMD rules.
Other provisions
In addition to the foregoing, the EARN Act would also –
Reduce the allowable minimum service requirement under a 401(k) plan for “long-term part-time employees” (working more than 500 but less than 1,000 hours per year) from 3 to 2 consecutive years.
Allow 401(k) matching contributions for student loan payments as if those payments were elective deferrals.
Waive the 10% early distribution tax for (1) certain emergency distributions, (2) certain “eligible distributions to domestic abuse victims,” (3) distributions to terminally ill individuals, and (4) distributions of up to $2,500 per year for premiums on certain long term care insurance contracts.
The proposal would also provide permanent rules allowing up to $22,000 to be distributed in connection with qualified federally declared disasters without triggering the 10% early distribution tax. Taxation of the distribution could be spread over three years. Finally, in the case of such a disaster, permitted loan amounts could be increased and the time for their repayment extended.
Allow “small immediate financial incentives” (e.g., a toaster) for 401(k) plan contributions.
Increase the catch-up contribution limit for participants between ages 60 and 63 from the current limit of $6,500 to $10,000. Beginning in 2024, catch-up contributions could only be made on a “Roth” basis.
Allow the employer to rely on an employee hardship certification for 401(k) hardship withdrawals.
Allow prior-year (retroactive) benefit increases until the tax return due date (with extensions).
Instruct Treasury to “simplify and standardize the rollover process by issuing sample forms for direct rollovers that may be used by both the incoming and outgoing retirement plan or IRA.”
Allow the provision of automatic portability services and provide a $500 credit for small employers that adopt an automatic portability arrangement. We this provision in more detail in our June 2022 Legislative Update.
Provide new rules for the recovery (or non-recovery) and rollover of overpayments.
Increase the start-up credit for very small employers (25 or fewer employees) from 50% to 75%.
Expand the Employee Plans Compliance Resolution System (EPCRS).
Make the current (temporary) IRS safe harbor for the correction of certain auto-enrollment errors permanent.
Provide a $500 credit (for up to 3 years) for small employers adopting a rule requiring that the plan, at least every three years, reenroll at the plan default rate those employees contributing less than that rate.
Extend the period during which certain transfers of DB surplus could be made to fund certain health and life benefits from (currently) December 31, 2025, to (proposed) December 31, 2032, and permit transfers of up to 1.75% of plan assets if the plan is at least 110% funded.
Require Treasury, DOL, and the Pension Benefit Guaranty Corporation to review and report to Congress on plan notice and disclosure requirements.
Require the GAO to review and report on the effectiveness of plan distribution/rollover notices.
Allow for simplified annual disclosure for “unenrolled” DC participants.
Allow participants to elect to treat employer matching and non-elective contributions as Roth contributions.
Outlook
The three pieces of comprehensive bipartisan retirement policy legislation introduced this year – SECURE 2.0, the Rise & Shine Act, and the EARN Act (discussed in this article) – will be reviewed in a set of informal conferences amongst the committees of jurisdiction (in the House, the Ways and Means Committee and the Education and Labor Committee, and in the Senate, the Finance Committee and the HELP Committee) with a view producing a single bill.
Some believe there is a significant chance that that bill could pass this Congress, for instance in a post-election lame duck session.
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We will continue to follow this legislation.
This is a publication of O3 Plan Advisory Services. If you have any comments, or have questions about regulatory developments, please contact your relationship manager or Mike Barry at mbarry@octoberthree.com. The information, analyses and opinions set out herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Nothing herein constitutes or should be construed as a legal opinion or advice. You should consult your own attorney, accountant, financial or tax advisor or other planner or consultant with regard to your own situation or that of any entity which you represent or advise. Information set out or referred to above has been obtained from sources believed to be reliable. However, neither O3 Plan Advisory Services nor any of its affiliates has verified the accuracy or completeness of any such information. All information is provided “as is” and O3 Plan Advisory Services and its affiliates expressly disclaim all express and implied warranties regarding the information. Neither O3 Plan Advisory Services nor any of its affiliates shall have any liability for any use of the information set out or referred to herein.