By Will Diem
Significant changes may be coming to 401ks and other tax-advantaged accounts.
On April 2nd, the “Setting Every Community Up For Retirement Enhancement Act of 2019,” (SECURE) Act passed the House Ways and Means Committee. It is an amended and expanded version of the “Retirement Savings and Enhancement Act” (RESA) that had stalled in the last congress. The new bill appears to be fast-tracked in the House–Forbes notes that the bill emerged from committee with unanimous approval before the text had even been published on the congressional website.
Shai Akabas, director of economic policy at the Bipartisan Policy Center, told CNBC that legislators of both chambers are “now getting to the point where there’s momentum to get [a reform to the laws governing retirement accounts] across the finish line.”
The House bill makes a host of changes to existing law, but particularly significant for many employees and retirees who already have 401ks would be a provision that raise the age at which required minimum distributions kick in–from 70 1/2 to 72–and another that eliminates age restriction on contributions to traditional 401ks. It also allows for penalty-free withdrawals from retirement plans in case of a birth or adoption.
A significant number of the provisions aim to make it easier for small employers to offer 401k plans to their employees, especially by encouraging them to band together to offer joint 401k plans, in what are known as “multi-employer plans” (MEPs) or “pooled plans.”
First, the bill would allow, “open” MEPs, that is it allows employers with no “common interest” to form pooled plans. This provision extends efforts made by the Department of Labor.
At the end of 2018, under an executive order from President Trump, the DOL proposed rule changes allowing companies that were only in the same geographic area or functioning in the same industry to forms MEPs. The SECURE Act, goes further, by removing the requirement of a common interest to from an MEP, rather than simply interpreting “common interest” more broadly.
Second, the bill removes the “bad apple” rule, under which all participants in an MEP would lose their eligibility if any one of them failed to meet its regulatory requirements. It has been speculated that the uncertainty introduced by this rule discouraged otherwise eligible employers from forming MEPs.
Third, the SECURE act remove the requirement that each employer in an MEP submit a separate IRS Form 5500. Under the bill, the MEPs would be able to submit a single consolidated report.
The bill includes other measures to help close what Rep. Ron Kind describes (according to Employee Benefit News) as the “black hole of retirement savings, especially in the small business world,” particularly by providing tax credits to small businesses for setting up pension plans. This includes a credit of up to $5000 for small employers to cover part of the cost of setting up a plan, available for three years after the plan is established, and an additional $500 credit (also available for three years) for offering an option for automatic contributions to either a 401k or a SIMPLE IRA.
The bill also expands eligibility to participate in 401k plans, by requiring that many permanent part-time employees (specifically those that work at least 500 hours a year over three years) be eligible to participate in their employer’s retirement plans if they are offered.
Additionally, the bill contains several provisions making it easier to hold lifetime income annuities in retirement plans.
Aside from reforms to retirement plans, the bill also relaxes rules surrounding 529 education savings plans, allowing funds from such plans to be used to cover costs associated with primary and secondary education (including homeschooling or religious schooling), apprenticeship programs, and repayment of up to $10,000 of student loans.
Meanwhile, in the Senate, an amended version of RESA was introduced into the Senate Finance Committee earlier this week. According to CNBC, it is expected to pass the Senate with bipartisan support.
As significant as these changes would be, they will not fully address the gap in retirement savings. According to a recent study, conducted by Natixis Investment Managers, those members of Gen X (aged 39-54) who had access to defined-contribution employer-sponsored retirement plans have saved only $166,328 on average–putting them well behind schedule to meet their average retirement goal, while Baby Boomers (aged 55-73), with access to employer retirement plans, have saved only 30% of their retirement goal, on average.
“I don’t think this Bill alone will solve the difficulty of Americans approaching retirement having adequate savings,” says Brian Kuhn, CFP® with Planning Solutions Group in Fulton, MD. “More employers offering 401k plans doesn’t mean the employees who work there have the cash flow to participate. That is a household decision not an employer one. And for the millions of people who are supported by household income or self-employed, this doesn’t change their options much.”
A summary of the bill–provided by the House Ways and Means committee–can be read here: https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf
This article was contributed to www.psgclarity.com, a division of Planning Solutions Group, a financial planning firm. If you would like to discuss your financial goals with Brian Kuhn, CFP® the financial planner quoted in this article you may schedule a time using the online scheduler at this website, or calling 301-543-6035 or emailing him at BKuhn@psgplanning.com.
No portion of the content in this article may be construed as investment or tax advice.
Securities offered through Triad Advisors, Member FINRA / SIPC. Advisory Services offered through Planning Solutions Group, LLC. Planning Solutions Group, LLC is not affiliated with Triad Advisors. PSG Clarity is a division of Planning Solutions Group, LLC