July 2022 legislative update – review of key bipartisan retirement policy reform proposals

On March 29, 2022, the House of Representatives, by a 414-5 vote, approved the Securing a Strong Retirement Act of 2022 (SECURE 2.0), a synthesis of the Ways and Means Committee’s Securing a Strong Retirement Act of 2021 and the Education and Labor Committee’s RISE Act. On June 14, 2022, the Senate Health, Education, Labor, and Pensions (HELP) Committee, by a voice vote, passed the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Act (the RISE & SHINE Act). And, on June 22, 2022, the Senate Finance Committee unanimously approved the Enhancing American Retirement Now (EARN) Act.

We expect that there will now be an informal conference amongst these committees on the various provisions included in each of these three bills, in an effort to reach an (informal) agreement on a single piece of legislation. Supporters hope that that legislation can be passed during this Congress, perhaps in a post-election lame duck session.

In what follows we provide a brief summary of certain key provisions of these three bills.

Summary of selected provisions of the three bipartisan retirement policy reform proposals

Student loan repayment provision that addresses nondiscrimination testing (SECURE 2.0 and EARN Act):

Under SECURE 2.0, sponsor contributions to a 401(k) plan that “match” student loan repayments would generally be treated as “regular” 401(k) employer matching contributions. And plans would be permitted to perform the ADP test separately for those participants receiving matching contributions on loan repayments. A similar student loan proposal is included in the EARN Act.

Establishment of a database – the Retirement Savings Lost and Found – to help participants locate benefits (SECURE 2.0 and EARN Act):

SECURE 2.0 instructs the Secretaries of Labor, the Treasury, and Commerce to, within 2 years of enactment, establish an online searchable database, managed by DOL, known as the “Retirement Savings Lost and Found” (RLSF). Individuals would be allowed to search the database for plan contact information. DOL could use the database to assist participant searches and is to update the database’s plan contact information for, e.g., plan/corporate mergers. The bill would also significantly increase required reporting with respect to, e.g., mandatory transfers, supporting the RSLF database.

The EARN Act includes a similar provision except that (1) the RSLF would be maintained by Treasury and (2) Treasury would be required to take mandatory distributions of amounts under $1,000 and hold those amounts in an IRA-like account.

Changes to the required minimum distribution (RMD) rules (SECURE 2.0 and EARN Act):

SECURE 2.0 would increase the required beginning date for required minimum distributions (RMDs) to age 73-75 depending on age, as follows.

SECURE 2.0 would also: relax the RMD annuity rules; reduce the excise tax on failure to make an RMD; clarify that survivor benefits may be paid in the case of divorce; and eliminate the limit (under current RMD rules) on the value of a qualified longevity annuity contract (QLAC) to 25% of the participant’s account.

EARN includes these changes and would, in addition:

• Increase the dollar limit on QLACs from $135,000 to $200,000

• Eliminate the penalty on partial annuitization, permitting aggregation of distributions from both annuity and non-annuity distributions to satisfy the RMD rules

• Clarify that the substantially equal periodic payment rule continues to apply after a rollover and certain annuity exchanges

• Eliminate pre-death distribution requirements for Roth accounts

• Allow a surviving spouse to elect to be treated as the deceased employee for purposes of the RMD rules

Instructions to DOL to review its annuity provider selection guidance (SECURE 2.0 and Rise & Shine):

Both SECURE 2.0 and the Rise & Shine Act include an instruction to DOL to review its Interpretive Bulletin 95-1 related to selection of annuity providers (quoting the Rise & Shine Act) “to determine whether amendments to [it] are warranted.” (This provision is a manifestation of emerging policymaker concern about pension risk transfer transactions.)

Limit on catch-up contributions to Roth only and an increase the catch-up contribution limit to $10,000 for certain participants (SECURE 2.0 and EARN Act):

Under SECURE 2.0, as a revenue raiser, 401(k) catch-up contributions could only be made on a Roth basis – taxed when going in but not taxed when going out. And the limit for participants at least age 62 but not age 65 would be increased from $6,500 to $10,000. The EARN Act includes both of these changes, except that the higher catch-up limit is available “beginning between age 60 and 63.”

Revisions to the Saver’s Credit (SECURE 2.0 and EARN Act):  SECURE 2.0 would increase the income limits on the Saver’s Credit. The EARN Act would make more fundamental changes, making the credit refundable and requiring that, instead of being credited directly to the taxpayer, it be paid to the taxpayer’s plan or IRA.

Increase in the cap on mandatory distributions from $5,000 to $7,000 (SECURE 2.0 and the Rise & Shine Act):

Under current law, a plan may not make a distribution without the participant’s consent if the participant’s accrued benefit is valued at more than $5,000. Both SECURE 2.0 and the Rise & Shine Act would increase this limit to $7,000.

Proposals for emergency savings within the retirement system (EARN Act and Rise & Shine Act):

The EARN Act would allow penalty free early withdrawals “for certain distributions used for emergency expenses, which are unforeseeable[,] or immediate financial needs relating to personal or family emergency expenses.” The Rise & Shine Act would allow a defined contribution plan sponsor to establish a “pension-linked emergency savings account.”

Enhanced participant disclosure for lump sum windows (Rise & Shine Act):

The Rise & Shine Act would require that plans offering a “lump sum window” (e.g., a limited-time offer of a lump sum as an alternative to current or future annuity payments) would be required to provide notices to participants and to DOL and the PBGC, including (in the notice to participants) “Whether it would be reasonably likely to replicate the plan’s stream of payments by purchasing a comparable retail annuity using the lump sum.”

New 401(k) ADP testing safe harbor (EARN Act):

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%.

Limit the IRS mortality improvement assumption for purposes of the DB minimum funding rules to 0.78% (EARN Act):

The EARN Act provides that a DB plan would not be required to apply a mortality improvement scale for purposes of the minimum funding rules that is greater than 0.78% (a significantly lower improvement assumption than under current rules).

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As noted above, it is expected that these three bills will go through an informal conference process designed to produce a single bill that can then be moved in this Congress, perhaps in a post-election lame duck session.

We will continue to follow these issues.

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.   The 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.