The Senate Finance Committee approved the Enhancing American Retirement Now (EARN) Act — the Finance Committee’s version of SECURE 2.0 — by a vote of 28 to 0 on June 22. The bipartisan legislation includes a broad range of provisions intended to increase retirement savings, encourage plan sponsorship, and simplify plan administration and compliance. SECURE 2.0 discussions now move into a new phase during which lawmakers will negotiate a final bill that encompasses provisions of the Securing a Strong Retirement Act approved by the House on March 29; the RISE & SHINE Act approved by the Senate Health, Education, Labor and Pensions (HELP) Committee on June 14; and the EARN Act.
Provisions in the EARN Act address a range of issues, including pooled employer plans (PEPs), multiple employer plans (MEPs), reporting and disclosure, plan eligibility and more. The Finance Committee approves legislation based on descriptive text rather than legislative language, so additional details about the legislation may emerge once the actual legislative language is released.
Key provisions
Following are key provisions of the EARN Act. Negotiators will have to resolve any differences between provisions that are similar to those in the Securing a Strong Retirement Act or the RISE & SHINE Act when the final legislation is negotiated.
- Automatic enrollment: A new, additional safe harbor, called a secure deferral arrangement, would allow higher default contributions and higher escalation for participants who are automatically enrolled. In general, employers could automatically enroll participants at a contribution rate of at least 6% of compensation and automatically escalate 1% per year until the employee is contributing at least 10% of compensation. Employers would be required to match 100% of the first 2% of deferred compensation, 50% of 3% to 6% of compensation and 20% of 7% to 10% of compensation. Small employers that use this safe harbor would qualify for a tax credit. The provision would take effect after 2023. The House bill would require automatic enrollment for new defined contribution plans.
- Increase required beginning date for RMDs: The required beginning date for required minimum distributions (RMDs) would increase to age 75 beginning in 2032. The House bill includes a provision that would phase the required beginning date to age 75 by 2033.
- Higher catch-up contribution for individuals age 60 to 63: The annual catch-up contribution limit would be $10,000 ($5,000 in SIMPLE plans and SIMPLE IRAs) for employees who are age 60 to 63 beginning in 2025. Under the House bill, higher catch-up contributions would apply for those age 62 to 64.
- Mandatory Roth treatment for catch-up contributions: Catch-up contributions to 401(k), 403(b) and governmental 457(b) plans would be required to be made on a Roth basis by participants whose income exceeds a not-yet-determined income threshold. The income threshold, added by an amendment approved during the committee’s deliberations, would be designed to ensure the estimated cost of the legislation does not change. The provision serves as a revenue offset for other provisions in the legislation. Under the House bill, all catch-up contributions would be made on a Roth basis.
- Matching contributions on student loan payments: Employers would be permitted to make matching retirement plan contributions based on an employee’s qualified student loan payments, and separate nondiscrimination testing for employees who receive such matching contributions would be allowed. The plan would be required to match and vest qualified student loan payments and elective deferrals at the same rate. The provision, also included in the House bill, would take effect after 2023.
- Reduced tenure for part-time employee eligibility: Part-time employees would be eligible to participate in employer-sponsored defined contribution plans after they have completed 500 hours of service for two consecutive years (rather than three consecutive years as required under the SECURE Act). The provision would apply for plan years beginning after 2022 and is included in the House bill and the RISE & SHINE Act.
- 403(b) plan investment in collective investment trusts: Contributions to 403(b) custodial accounts could be invested in collective investment trusts. The provision would be effective after the date of enactment. Due to legislative jurisdiction restrictions, securities law exemptions related to this requirement are not included in the EARN Act. The provision is also included in the House bill.
- 403(b) MEPs: In general, 403(b) MEPs and PEPs would be permitted for plan years beginning after the date of enactment. The House bill and the RISE & SHINE Act would also authorize 403(b) MEPs and PEPs.
- Small immediate financial incentives for plan participation: Employers would be permitted to offer de minimis financial incentives, such as small gift cards, to encourage participation in 401(k) and 403(b) plans for plan years that begin after the date of enactment. The provision is also in the House bill.
- Distributions for emergency expenses: The legislation would authorize emergency personal expense distributions, which would allow individuals to take penalty-free distributions of up to $1,000 for unforeseeable or immediate personal or family expenses. The plan sponsor could rely on the employee’s certification that the distribution is an eligible emergency personal expense distribution. The provision generally would permit one distribution per year. Distributions could be repaid over a three-year period. Additional emergency distributions during the three-year repayment period would be prohibited unless the previous distribution had been repaid or the individual had subsequently made contributions in an amount at least equal to the amount of the prior emergency distribution. The provision would take effect in 2024. The HELP Committee’s RISE & SHINE Act would authorize separate emergency savings accounts linked to employer-sponsored defined contribution plans.
- Safe harbor for corrections of employee elective deferrals: The legislation would establish a grace period to correct automatic contribution errors without penalty if certain conditions are met. The House bill includes a similar provision.
- Remove RMD barriers for life annuities: The legislation would allow life annuities in defined contribution plans and IRAs that include certain annual increases, lump sum return of premium death payments and other features. The House bill includes a similar provision.
- Qualifying longevity annuity contracts: The legislation would modify the rules for qualifying longevity annuity contracts (QLACs) by repealing the provision that limits QLAC premiums to 25% of the account balance, increasing the dollar limit from $145,000 to $200,000; facilitating QLACs that allow spousal survivor rights; and making other changes. The House bill includes a similar provision.
- Variable exchange-traded funds (ETFs): The Secretary of the Treasury would be directed to update regulations to facilitate the use of ETFs in variable insurance contracts. The provision generally would be effective seven years after enactment. This provision is also included in the House bill.
- Recovery of plan overpayments: In general, plan fiduciaries could decide that the plan will not recover overpayments mistakenly made to retirees, and the legislation would establish protections for retirees who receive overpayments. The provision would generally apply for plan years beginning after enactment. The provision is also in the House bill and the RISE & SHINE Act.
- Reduced penalty for failure to take RMDs: The excise tax for failure to take RMDs would be reduced to 25%. If the failure is corrected in a timely manner, the excise tax would be reduced to 10%. The provision would be effective for taxable years beginning after enactment. The provision is also in the House bill.
- Report to Congress regarding reporting and disclosure requirements: The Department of the Treasury, the Department of Labor and the Pension Benefit Guaranty Corporation would be directed to review current reporting and disclosure requirements for retirement plans and make recommendations to Congress to consolidate, simplify and improve the requirements. The House bill and the RISE & SHINE Act also include this provision.
- Disclosure relief for unenrolled employees: Defined contribution plans would not be required to provide notices to unenrolled participants, except for an annual reminder that the individual is eligible to participate in the plan. The provision would take effect for plan years beginning after enactment. The provision is also in the House bill and the RISE & SHINE Act.
- Retirement savings lost and found: The legislation incorporates the Retirement Savings Lost and Found Act, which would direct Treasury to establish a national database to help workers locate retirement benefits from former employers. In addition, it would increase the cash-out limit to $6,000. The House bill includes lost and found program provisions and would increase the cash-out limit to $7,000. The RISE & SHINE Act would increase the cash-out limit to $7,000.
- Self-correction of inadvertent violations: In general, inadvertent plan violations could be self-corrected under the Employee Plans Compliance Resolution System (EPCRS) without a submission to the IRS unless the IRS discovers the violation before the employer can show that it has taken action that demonstrates a commitment to correction. The provision would take effect after the date of enactment. The House bill includes a similar provision.
- Eliminate the 457(b) “first day of the month” requirement: Participants in a 457(b) plan would be permitted to request changes in their deferral rate prior to the date that the compensation being deferred is available (rather than prior to the beginning of the month in which the deferral will be made). The provision would apply after the date of enactment. The provision is also in the House bill.
- Matching and nonelective contributions may be made on a Roth basis: Employers may permit employees to elect for their matching and nonelective contributions under 401(k), 403(b) and governmental 457(b) plans to be made fully or partially on a Roth basis after 2022. This provision serves as a revenue raiser and is also included in the House bill, where it is limited to matching contributions.
- Top-heavy testing: If a plan covers employees who are otherwise excludable under the general age and service rules and the employees separately meet the top-heavy minimum contribution rules, the employees may be excluded from consideration in determining if the plan (or any plan of the employer) satisfies the top-heavy rules. The provision would be effective for plan years beginning after enactment. The House bill also includes this provision.
- Distributions to firefighters: The legislation would extend existing special distribution rules for qualified public safety employees to private sector firefighters after the date of enactment. The provision is also in the House bill.
- Saver’s credit: The Saver’s credit would be 50% of eligible retirement contributions for taxpayers with adjusted gross income below the threshold specified in the legislation (initially $41,000 for joint filers, $30,750 for heads of household and $20,500 for single taxpayers). The credit would phase out for filers with income exceeding the initial thresholds. In addition, the credit would be refundable. The House bill includes different provisions to modify and promote the Saver’s credit.
- Repayment of qualified birth and adoption distribution: Repayment of qualified birth or adoption distributions would have to be made within three years of the date the distribution was received. The SECURE Act, which authorized the distributions, did not limit the repayment period. The provision is also in the House bill.
- Self-certification of hardship: Employees would be permitted to self-certify that an event constitutes a hardship for purposes of hardship withdrawals. In addition, the legislation would codify the current rule that permits self-certification regarding that the amount of a distribution does not exceed the need. The provision would be effective for plan years beginning after the date of enactment and is also included in the House bill.
- Domestic abuse withdrawals: The legislation would permit penalty-free, repayable withdrawals of up to $10,000 in the case of domestic abuse. The provision is also in the House bill.
- Family attribution rules: For purposes of determining whether two or more businesses must be aggregated for certain non-discrimination tests, ownership by family members is attributed to other family members. The legislation would make changes to these attribution rules, including by disregarding community property laws. The House bill also includes the provision.
- Retroactive plan amendments: Certain retroactive plan amendments that increase benefits (other than matching contributions) for a year could be made by the due date of the employer’s tax return for the year. This provision is also in House bill.
- Auto-portability: Retirement plan service providers would be permitted to provide employers with automatic portability services, which would allow automatic transfers of a participant’s default IRA into a new employer’s retirement plan if certain conditions are met.
- Conform 403(b) and 401(k) hardship rules: The legislation would conform the current 403(b) and 401(k) hardship rules after the date of enactment. The House bill also includes this provision.
- Treasury guidance on rollovers: Treasury would be directed to issue sample forms by 2025 for direct rollovers and trustee-to-trustee transfers, to help simplify, standardize and facilitate such rollovers and transfers. The forms would be required to apply to both the distributing plan and the receiving plan or IRA.
- 415 limit for rural electric cooperative plans: The section 415 compensation limit would be repealed for non-highly compensated employees who participate in a plan offered by a rural electric cooperative plan. The provision would take effect for limitation years ending after the date of enactment.
- Eliminating incentives not to partially annuitize: Where a portion of an interest in a retirement plan is distributed in the form of annuity payments, and the annuity payments exceed the amount that would be required to be distributed under the individual account rules based on the value of the annuity, the excess annuity payment amount for a year could be applied toward the RMD for the year with respect to any remaining interest in the same retirement plan.
- Distributions for individuals with terminal illness: The 10% penalty on early distributions would not apply when distributions are made to employees who are certified by a physician as having an illness or physical condition that is reasonably expected to lead to death within 84 months after the date of the certification. The provision would be effective after the date of enactment.
- Surviving spouse election to be treated as employee: A surviving spouse could elect to be treated as the deceased employee for purposes of the RMD rules, effective in 2024.
- Long-term care contracts purchased with retirement account distributions: In general, the provision would allow individuals to take penalty-free distributions of up to $2,500 annually to pay qualifying long-term care premiums. The provision would take effect three years after enactment.
- Disaster relief: The provision would codify permanent rules regarding the use of retirement plan assets following declared disasters. In general, qualifying individuals could withdraw up to $22,000. Amounts would be penalty-free and repayable. Income could be included over three years. Special rules would apply for amounts that were previously withdrawn for the purchase of a home. The provision would be retroactive to disasters occurring on or after January 26, 2021, and would eliminate the need for the IRS to issue disaster relief on a disaster-by-disaster basis.
- Starter 401(k) and 403(b) plans: Employers that do not sponsor a retirement plan could offer a “starter 401(k)” or “safe harbor 403(b)” plan. In general, the employer would be required to default all employees into the plan at a contribution rate of 3% to 15%. The limit on annual deferrals, and the annual catch-up limit, would mirror the annual IRA limits. For 2022, the IRA contribution limit is $6,000 and the catch-up limit is $1,000. A separate provision would index the IRA catch-up limit.
- Mortality proposal: The legislation would require the Secretary of the Treasury to amend the regulation relating to “Mortality Tables for Determining Present Value Under Defined Benefit Pension Plans” (October 5, 2017). Under the amended regulations, for valuation dates occurring during or after 2022, mortality improvement rates would not assume future mortality improvements at any age that are greater than 0.78%. Further regulatory amendments would be made to modify the 0.78% figure as necessary to reflect material changes in the overall rate of improvement projected by the Social Security Administration.
- Section 420: The sunset date for section 420 transfers would be extended until 2032 (from 2025 under current law). In addition, limited transfers to pay retiree medical or life insurance would be permitted for plans that are at least 110% funded.
- 402(f) notices: The Government Accountability Office would be required to report to Congress on the effectiveness of section 402(f) notices.
- Small employer tax credits: The legislation would expand the current-law tax credit for small employers to offer retirement plans by increasing the credit percentage from 50% to 75% of eligible expenses for employers with up to 25 employees. In addition, the credit would be available to eligible employers that join a MEP or PEP, regardless of how long the MEP or PEP has been in existence. In addition, the legislation would establish new tax credits for small employers that automatically reenroll employees in automatic enrollment arrangements and small employers that adopt automatic portability. The House bill also includes tax credit provisions for small employers, although there are significant differences between the House and Senate Finance Committee bills.
The legislation also includes technical corrections to the SECURE Act, additional provisions addressing small employer plans and IRAs, and other changes.
Going forward
Lawmakers will now work to negotiate a final bill that includes provisions of the House, Senate Finance Committee and Senate HELP Committee bills. Final legislation could be enacted later this year, possibly after the November elections.
