The House of Representatives and the Senate are working together to reform laws governing retirement plans like 401(k)s and traditional IRAs. The initiatives of the two bodies raise the age limit for minimum distributions removed (RMD). And they both allow employers to treat student loan repayments as an optional contribution for the purposes of matching 401(k) plans, potentially boosting retirement savings for young workers who often prioritize paying off debt. 401(k) contributions. But these House and Senate initiatives also differ. Here is a comparison.
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Similarities between House and Senate efforts on pension reform
In March, the House of Representatives passed the SECURE 2.0 Act. Intended to follow up on the SECURE Act of 2019, the bill makes significant changes to 401(k) and 403(b) plans. Now the Senate is moving forward with its own updates to workers’ pensions. The agency’s version of SECURE 2.0, called the Enhancing American Retirement Now (EARN) Act, passed the Senate Finance Committee in June, while a companion bill called the RISE & SHINE Act was presented to the Senate at the beginning of the same month.
At the time of writing, the EARN Act has yet to be written into a formal bill and therefore does not have a legislative number. Instead, the Senate Finance Committee adopted a legislative summarywhich is now to be rewritten as an official bill and will likely be combined with the RISE & SHINE Act in the Senate version of SECURE 2.0.
EARN and Secure 2.0 overlap in many, if not most important ways. They both increase the age cap for RMDs and allow employers to treat student loan payments as an optional contribution for the purposes of matching 401(k) plans. This has the potential to dramatically increase the retirement savings of young workers, who often prioritize paying off debt over 401(k) contributions.
Differences between House and Senate efforts on pension reform
Despite these similarities, there are several differences between House of Representatives and Senate initiatives to improve national laws governing retirement savings plans:
Minimum required distributions
Under the House bill, the age limit for RMDs would gradually increase over a 10-year period. Currently, retirees must start drawing on their retirement account no later than age 72. The House SECURING Act 2.0 would increase this to 73 from 2022, then to 74 from 2029, and finally to 75 from 2032.
The Senate EARN Act would eliminate the intermediate steps, raising the age cap for RMDs directly to 75 starting in 2032.
Automatic registration
In the House version of SECURE 2.0, most employers would be required to adopt what is known as “auto-enrollment”. This means that for employers who offer a 401(k) or 403(b) retirement plan, all employees would be automatically enrolled in the plan at a 3% contribution rate. Employees can choose not to participate in this pension plan or can adjust their level of contribution as they see fit.
Current law allows an employer to automatically enroll all employees in their 401(k) plan, but this is discretionary. Comments from members of the House of Representatives indicate that this provision is intended to increase participation in pension plans, since employers who operate automatic enrollment programs almost always see significantly higher employee participation rates.
Senate bills do not require automatic registration. However, the RISE & SHINE law requires that if an employer runs an automatic enrollment plan, they must reenroll all employees every three years, unless they choose to opt out again.
Emergency distributions
The House SECURE 2.0 Act includes a provision that allows victims of domestic violence to dip into their retirement accounts, but it does not include language regarding generalized emergency funds.
Senate bills contain the same provision regarding victims of domestic violence. They also allow individuals to tap into their 401(k) and 403(b) accounts for emergency funds. Everyone does it in a different way.
Under the EARN Act, a person would be allowed to withdraw up to $1,000 in a single year for personal or household emergencies. They would pay no tax penalties as long as they repaid the money within three years and could only take out a new emergency loan after repaying the last one. This law would also allow a maximum distribution of $22,000 from employer pension plans or IRAs to people who have been affected by a declared disaster.
Under the RISE & SHINE Act, a 401(k) or 403(b) plan could include an emergency fund of $2,500. Individuals could withdraw from this fund once a month after tax.
terminal illness
The EARN Act would eliminate early distribution tax penalties for terminally ill people. This would allow patients to tap into additional funds for medical care or general end-of-life expenses.
Savings tax credit
The saver’s loan is a tax credit intended to help low-income households save for their retirement. At the time of writing, it allowed eligible low-income taxpayers to receive a non-refundable tax credit of 10% or 20% of their eligible contributions to a pension plan. Although not addressed in the SECURE 2.0 bill, the EARN Act would significantly expand this credit. Under this proposal, the credit would become a refundable tax credit paid directly into the taxpayer’s retirement account. As under current law, this would apply to 401(k), 403(b) and IRA plans. This would apply to households earning up to $71,000 a year, and taxpayers could receive a maximum credit of $2,000.
It is important to note that neither the EARN Act nor the RISE & SHINE Act passed the Senate. The EARN Act has not even been drafted into an official bill and is at the time of writing only a statement of legislative intent. As a result, the two can change significantly before a vote takes place.
Conclusion
Like the House of Representatives, the Senate is preparing to take significant action on retirement savings plans. From automatic registration to required minimum distributions, many different elements of this system seem subject to change. Among these changes are taking longer to start making required distributions and relaxing the conditions for emergency withdrawals.
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