Senate vote moves retirement reform one step closer to the finish line

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In late June, the Senate Finance Committee unanimously passed the Enhancing American Retirement Now (EARN) Act, taking an important next step in advancing changes to retirement plans and accounts.

The vote advances the proposal closer to reconciling the Senate version with the bipartisan SECURE 2.0 Act that passed the House in March. The EARN Act is expected to be combined with the Rise & Shine Act, which also passed recently through another key Senate committee.

The combined bill would need to be reconciled with the House bill before a vote by both chambers.

While much of the recently introduced EARN Act mirrors the SECURE 2.0 bill, there are some key differences.

Key differences in the EARN Act

No mandate to require employers to use auto-enrollment in retirement plans

While the SECURE Act establishes a mandate for newly established plans to auto-enroll employees, the EARN Act provides an incentive ($500 tax credit for up to 3 years) for employers to periodically re-enroll employees into the retirement plan at a default contribution rate. Employers with 100 employees or fewer would be eligible for the incentive. There is also an option for employers to establish a “starter” 401(k) or 403(b) plan through auto-enrollment with annual deferrals limited to the same amount as IRA contributions (currently $6,000 plus an additional $1,000 catch-up contribution at age 50).

Enhancements to SIMPLE IRA plans

The Senate version allows for higher contributions into SIMPLE plans. Employers can make additional uniform contributions above current limits not exceeding the lesser of 10% of compensation or $5,000. For employees, the annual deferral limit increases to $16,500 (from $14,000) with a higher catch-up contribution of $4,750 for those reaching age 50 (from $3,000).

Additional ways to avoid the 10% penalty on early withdrawals

A new provision would allow individuals to take emergency withdrawals of up to $1,000 without being subjected to the 10% early withdrawal penalty. The withdrawal could be repaid into the account within three years. No additional emergency withdrawals could occur within the three-year period if no repayment has occurred. Also, those facing a terminal illness could avoid the early withdrawal penalty on retirement account distributions. Lastly, distributions of up to $2,500 per year to pay for qualified long-term care insurance coverage would not be subject to the 10% penalty.

Differences in additional catch-up contributions

Both proposals introduce additional catch-up contributions for older plan participants. The Senate version allows an increase in the catch-up contribution to $10,000 ($5,000 for SIMPLE plans) for those age 60 through 63. The House version allows these higher catch-up contributions at ages 62, 63, and 64.

Increase the RMD age, but not gradually

Like its House counterpart, the Senate proposal increases the RMD age to 75. However, this increase is effective after 2031, while the House raises the age to 73 in 2022, to 74 in 2030, and to age 75 in 2033.

Both bills use Roth changes to offset costs

Lawmakers in both chambers are leveraging changes to Roth accounts to offset the costs of other provisions. Both versions would allow Roth accounts to be used within SIMPLE and SEP IRAs. Plan sponsors could offer the option of matching contributions made into designated Roth accounts. Lastly, catch-up contributions within 401(k) plans would have to be made into designated Roth accounts.

Retirement reform possible

With strong bipartisan support from both chambers heading into the conference process, it appears that momentum may be growing for passage of retirement legislation. A final compromise proposal would be voted on by both chambers of Congress before being sent to the President for signature.

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