The House and Senate are working along similar lines to reform the laws governing retirement plans like 401(k)s and traditional IRAs. Initiatives in both agencies raise the age limit for retiree minimum distributions (RMDs). Both allow employers to treat student loan payments as an optional contribution for purposes of matching 401(k) plans, which could stretch retirement savings for younger workers who often prioritize paying down debt over 401( k). But those House and Senate initiatives also differ. Here is a comparison.
Consider working with a financial advisor as you create or update your own retirement plan.
Similarities Between House, Senate Pension Reform Efforts
In March, the House of Representatives passed the SECURE 2.0 Act. The bill, intended as a follow-up to the SECURE Act of 2019, makes significant changes to 401(k) and 403(b) plans. Now the Senate is moving forward with its own updates to employee retirement plans. The chamber’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 introduced in the Senate earlier that month.
At the time of writing the EARN Act had not yet been drafted into an official bill, and therefore does not have a legislative number. Instead, the Senate Finance Committee approved a legislative summary, which must now be redrafted as a formal 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. Both raise the age limit for RMDs and allow employers to treat student loan payments as an optional contribution for purposes of matching 401(k) plans. This has the potential to significantly stretch retirement savings for younger workers, who often prioritize paying down debt over 401(k) contributions.
Differences between House, Senate pension reform efforts
Despite these similarities, there are several differences between the House and Senate initiatives to improve the nation’s laws governing retirement savings plans:
Required Minimum Distributions
Under the House bill, the maximum age for RMDs would gradually increase over a 10-year period. Currently, retirees must start using their retirement account by age 72 at the latest. House SECURE 2.0 would raise it to 73 starting in 2022, then age 74 starting in 2029, and finally age 75 starting in 2032.
The Senate EARN Act would eliminate the intervening steps, raising the RMD age directly to 75, effective in 2032.
Under the House version of SECURE 2.0, most employers will be required to adopt what is known as “auto-enrollment.” This means that for employers that offer a 401(k) or 403(b) retirement plan, all employees will be enrolled in the plan automatically at a 3 percent contribution rate. Employees may opt out of participating in this pension plan or may adjust their contribution level as they see fit.
Current law allows an employer to automatically enroll all employees in a 401(k) plan, but it is discretionary. Comments from members of the House of Representatives indicate that this provision is intended to increase participation in retirement plans, as employers that run automatic enrollment programs almost always see significantly higher employee participation rates.
The Senate bills do not require automatic enrollment. However, the RISE & SHINE Act requires that if an employer operates an automatic enrollment program, it must re-enroll any employee every three years unless they elect to opt out again.
The House SECURE 2.0 Act includes a provision that allows victims of domestic abuse to draw from their retirement accounts, but does not include language regarding generalized emergency funds.
The Senate bills include the same provision regarding victims of domestic abuse. They also allow individuals to draw from their 401(k) and 403(b) accounts for emergency funds. Everyone does this in a different way.
Under the EARN Act, an individual would be allowed to withdraw up to $1,000 in a single year for personal or household emergencies. They wouldn’t pay tax penalties as long as they pay off the money within three years, and they can’t get a new emergency loan until they’ve paid off the last one. This law would also allow a maximum of $22,000 to be distributed from employer retirement plans or IRAs to individuals who have suffered a declared disaster.
Under the RISE & SHINE Act, a 401(k) or 403(b) plan could include a $2,500 emergency fund. Individuals could withdraw from this fund once a month on an after-tax basis.
An incurable disease
The EARN Act would eliminate tax penalties for early distributions in the case of terminally ill individuals. This would allow patients to draw on additional money for medical care or general expenses at the end of life.
The Saver’s Tax Credit
The Saver’s Credit is a tax credit designed to help low-income households save for retirement. At the time of retirement, it allowed qualifying low-income taxpayers to receive a non-refundable tax credit of either 10% or 20% of their eligible pension plan contributions. Although not discussed 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, it will 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 have been passed by the Senate. The EARN Act has not even been drafted into a formal bill and at this time only a statement of legislative intent is being written. As a result, both can change significantly before any vote.
Like the House of Representatives, the Senate is preparing to take major action on retirement savings plans. From auto-enrollment to required minimum distributions, many different pieces of this system look likely to change. Among those changes are waiting longer for required distributions to kick in and easing the rules for emergency withdrawals.
Tips for retirement
How are your retirement savings stacking up? Take a look at where the average American earns retirement savings to see how your own account compares.
Don’t panic if you’re falling behind on retirement savings! Even a little extra work can make a big difference, no matter where you are in your professional life. And a financial advisor can help you get back on track. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide who is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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