Read the Tea Leaves on Retirement Savings Tax Legislation


Last year marked the centennial of the inclusion of tax incentives for workplace pension plans in the code. For the 101st anniversary, the passage of major tax legislation on retirement savings that refines the system seems increasingly likely. What provisions will make the bill final is still an open question, and there could be several changes before the presumed year-end deadline.

The odds of retirement legislation passing Congress are about as good this year as supporters might hope, and that’s partly because so many of the bill’s provisions have support from different members of the Congress of all parties. The most recent version, Enhancing American Retirement Now (EAR
N) Act, passed through the Senate Finance Committee on June 22 on a vote of 28 to 0. (Back cover: Federal tax notes, June 27, 2022, p. 2067.) At the June 22 markup hearing, senators touted various aspects of the proposal’s more than 70 provisions.

On June 14, the Senate Committee on Health, Education, Labor and Pensions approved the Enhancing Retirement and Savings to Complement Healthy Nest Investments (RISE & SHINE) Act. (S.4353). And the House passed the Securing a Strong Retirement Act of 2022 (HR 2954) in a 414-5 vote on March 29. — meaning Congressional efforts to coordinate and combine them in the coming months are achievable. Common themes of the proposals include incentives that would help taxpayers at all income levels, but not everyone agrees that it is appropriate to balance benefits between low-income taxpayers and those high income.

Lawmakers’ willingness to move forward with pension legislation could be tested before the end of the year, depending on whether another legislative vehicle is available for it. Although the legislative packages under consideration include elements that clearly appeal to individual members, the question remains whether enough lawmakers will approve the eventual bill.

Incentives for individuals

The highlight of the EARN Act for low-income taxpayers is the Savings Credit, which would transform the non-refundable credit for contributions to IRAs, employer pension plans and Life Experience Enhancement Accounts. into a government matching contribution to be deposited in a taxpayer’s account. IRA or retirement plan of 50% of taxpayer contribution, up to $2,000 per person. The phase-out of the credit would start at $41,000 of income for joint filers and end at $71,000 (the phase-out range for single taxpayers would be half those amounts). The Joint Committee on Taxation estimated (JCX-11-22) that matching payments would cost $9.5 billion over the 10-year fiscal window from 2022 to 2032, although the provision does not come into effect than in 2027.

On the other hand, the version of the House of credit to savers was not refundable. It set the credit at 50% of premiums up to $2,000 for families whose adjusted gross income did not exceed $48,000.

Penalty-free emergency expense withdrawals of up to $1,000 per year would be permitted for unforeseeable or immediate financial needs, but taxpayers would be required to repay the emergency expense distribution amount within three years, or none at all. no further emergency distribution would be permitted within three years of the distribution. This proposal aims to make retirement savings less daunting for taxpayers who may fear having to pay a 10% penalty to access their savings in an emergency. It is broadly consistent with several similar and enacted exceptions to the penalty for early distributions from 401(k) plans, such as the exceptions for first-time home buyers and medical and education expenses.

The question of whether this provision takes effect is whether it helps encourage taxpayers who don’t have a retirement savings account to start saving by assuring them they can access $1,000 if they don’t. they need it, or whether it will simply become another way for current savers to access their pre-retirement savings. The exception for emergency expenditures is estimated at $1.5 billion over 10 years.

Michael L. Hadley of Davis & Harman LLP said the EARN Act’s emergency expense exception will be familiar to pension plans because it works much like advance distributions allowed under the Aid Act. , coronavirus relief and economic security, and distributions for qualified births or adoptions. Administering the emergency expense exception would require plan administrators to institute a mechanism to track distributions and refunds under the refund rule before added distributions. Hadley said employers could find ways to offer emergency savings other than a solution built into the plan. Offering withdrawals for emergency expenses would be optional for plans under the EARN Act.

Raising catch-up limits to allow participants to contribute $10,000 more each year between ages 60 and 63 is one of the more controversial provisions, as higher income earners are more likely to use it. The EARN Act catch-up limits expand on previous changes, which were intended to allow taxpayers who had career hiatuses to save extra money for retirement when they earn the most to catch up on periods. without contributions.

Part-time employees with at least 500 hours of service in two consecutive years should be allowed to participate in employer-sponsored 401(k) plans under the EARN Act, representing a decrease in the number of employees. years of employment compared to the three-year requirement in the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019.

This seemingly simple change is difficult to administer properly, Hadley said, pointing to the challenges of the SECURE Act changes. For example, it’s unclear how employers who count elapsed time instead of tracking hours will apply the new SECURE Act rule to their part-time employees.

The potential combined effect of changes to both the SECURE Act and a subsequent bill this year could be greater availability of savings opportunities for part-time employees than contemplated by the EARN Act, whether employers allow all part-time employees to contribute to a 401(k) instead of attempting to implement hours and years of service requirements. But even if that happens, the IRS and Treasury should provide guidance on other implementation issues, including how to conduct non-discrimination testing when employers offer the opportunity to save to more part-time employees than are required by law to have this option, Hadley said.

One of the smaller changes to the EARN Act allows employers to offer small financial incentives to encourage employees to enroll and contribute to savings plans. It would give employers another tool to motivate employees to buy into the plan, Hadley said. By allowing employers to offer de minimis incentives, such as a small value gift card, to enroll in a plan and make a contribution, the provision aims to strengthen automatic enrollment by allowing employers to join more easily a larger number of employees.

The cost of the proposal to increase the age of required mandatory distributions is the second highest in the EARN Act, at $4.4 billion in 2032, after the consideration payments provision. The proposal to raise the age of mandatory distributions from 72 to 75 would be effective after 2031, putting its potential costs mostly outside the 10-year fiscal window.

Employer plans

Like the range of proposals for individual taxpayers, some of the EARN Act proposals target small employers, and others target larger ones. The IRS and Treasury would have at least one major policy project to complete soon after the bill passes.

Employers with 100 or fewer employees who adopt a plan with automatic enrollment and employer matching contributions would be eligible for a credit for five years equal to the amount of the matching contributions, up to a maximum of the first 2 percent of employer contributions. an employee, except for matching contributions. contributions for the highest paid employees. This provision is one of the most important in the bill, with an estimated amount of $3.3 billion over 10 years.

The EARN law proposes to allow self-correction of many operational errors. This would correct inadvertent failures that are not obvious. This change would benefit plans of all sizes, but perhaps especially larger plans, as they are more likely to be audited so that errors are detected. Hadley said the IRS employee plans compliance resolution system works, but allowing self-correction in many circumstances would eliminate the need for plans to prepare a submission to the program for each error and would therefore be more profitable. Under the proposal, the IRS would issue guidelines on required correction methods for specific situations in which self-correction is used, as well as general principles for correcting other errors.

A proposal to add a $500 credit for employers who offer a re-enrollment feature in their plans aims to build on the success of auto-enrollment. Re-enrollment should occur at least every three years and would include not only default enrollment of employees who do not participate in the plan, but also raising the default contribution rate that employees have set to a level below the failure.

As the retirement proposals move forward, the exact contours of the final package will become clearer. In light of the midterm elections and the impending retirement of Senate Finance Committee member Rob Portman, R-Ohio, who along with fellow committee member Benjamin L. Cardin, D-Md., was one of the central figures in retirement legislation over the past several decades, getting a finish line bill by the end of the year will likely be a priority for Congress, if it there is a vehicle to which it can be attached.


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