Major changes to 401 (k) pension plans approach with Senate vote

Americans could wait longer to begin emptying retirement accounts and face fewer restrictions on emergency withdrawals under a bill unanimously tabled Wednesday by the Senate Finance Committee.

The bipartisan bill is broadly similar to a measure passed by Parliament by a vote of 414-5 in March, although it contains higher pension savings subsidies for low- and middle-income workers. The Senate move this week raises the chances of Congress making changes to the U.S. Pension Act this year.

“It’s a testament to the power of bipartisanship,” said Sen. Mike Crapo (R., Idaho), a leading Republican. “When we work together, we can create an impressive and lasting project.”

Paul Richman, head of government and political affairs at the Insured Retirement Institute, which represents the insurance industry and supports the bill, said the legislation could be included in a larger fiscal bill after the November midterm elections. Parliament and the Senate must also resolve their different approaches.

The bipartisan measure will be based on changes to the pension policy introduced in 2019, which, among other things, raised the age at which they had to start withdrawing money from retirement accounts to 72 out of 70 ½.

According to the Boston College Retirement Research Center, about half of American households have not saved enough and are in danger of seeing their standard of living decline after retirement.

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The new legislation seeks to balance the key tension in federal retirement tax incentives between encouraging long-term savings with money-locking rules and the need to allow flexibility for emergencies and other financial goals.

A discrepancy between the House and Senate bills concerns the age-enhancing timetable at which savers must begin receiving withdrawals from 401 (k) type accounts and traditional individual retirement accounts. The Senate bill raises the age from 72 today to 75 in 2032, while the House bill will raise it to 73 next year, 74 in 2030 and 75 in 2033.

The Senate bill would allow withdrawals of up to $ 1,000 a year to cover emergency expenses without paying the 10% penalty typically owed by people under the age of 59, although the money must be reimbursed before the person can receive another such distribution within three years. The Parliament bill does not have such a provision.

The Senate bill also includes provisions for certain impunity for terminally ill patients, victims of domestic abuse, those affected by federal disasters, and the payment of long-term health insurance premiums – all measures not included in the House version.

House and Senate bills also differ on the savings credit, a government equation for lower- and middle-income workers who place money in retirement accounts. Under the Senate bill, the government would put up to $ 1,000 a year in the retirement accounts of eligible employees from 2027, regardless of whether they owe income tax. Eligibility is phased out for people earning $ 20,500 to $ 35,500 and married couples earning between $ 41,000 and $ 71,000.

“Medium-income workers will get an extra boost in their savings they did not have before,” said Senate Finance Committee Chairman Ron Weiden (D., Ore.), Who said the changes would double the number of people who are eligible for credit.

According to the House version, the credit is only available to people with income tax liability and is not deposited in the individual’s retirement account. It is phased out at higher income levels.

So-called tax rebates, like this one, often provoke objections from Republicans and can become a tipping point as lawmakers negotiate.

House and Senate bills also differ in the age at which older employees could make additional contributions to 401 (k) retirement accounts.

Currently, people aged 50 and over can contribute an additional $ 6,500 per year to these accounts, for a total of $ 27,000. The Senate bill will increase the amount of $ 10,000 per year for people 60 to 63, compared to 62 to 64 according to the issue of Parliament. Additional contributions must be paid after taxes.

The House version would create mandatory automatic enrollment in retirement savings starting in 2024 for many of the newly created 401 (k) or 403 (b) plans, and proponents say this would boost minority participation rates. Instead, the Senate issuance will seek to encourage employers to use auto-registration with provisions that include tax deductions for small employers, according to Mark Iwry, a senior fellow at the Brookings Institution and a former Treasury official in charge of national pension policy.

Other provisions of the Senate bill would allow individuals with Roth 401 (k) to bypass the required distributions and allow employers to make corresponding contributions to the 401 (k) type accounts of employees who repay student loans that do not contribute enough to receive the full fight.

Some lawmakers, academics and policy analysts have criticized some of the provisions, including the move to raise the retirement age required to 75. They argue that much of the legislation benefits the wealthy and the financial services industry, which usually benefits by fees related to the size of retirement accounts.

While boosting savings credit would help low- and middle-income households, it would “leave them far less incentive for the wealthy on the bill,” said a statement from Americans for Tax Fairness, a coalition of progressive groups. . favoring tax increases for high-income people.

Both bills are said to pay for themselves with retirement policy changes that speed up revenue in the 10-year Congressional budget period used to take into account the cost of legislation, to the detriment of future revenue over the next decade.

One would require employees aged 50 and over who make additional contributions to 401 (k) plans to do so through Roth accounts, which require people to contribute after-tax money by waiving the tax deductions they would receive with them. traditional accounts.

Write to Richard Rubin at richard.rubin@wsj.com and Anne Tergesen at anne.tergesen@wsj.com

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