Congress wants to change the US pension system further. Here’s what’s at stake

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Less than two years after the Secure Act introduced major changes to the country’s pension system, more changes could be on the horizon.

Two similar, bipartisan bills – one each in the House of Representatives and one in the Senate – aim to build on this 2019 legislation to strengthen saver ranks and increase pension security. While the measures are still in the early stages of the legislative process, observers expect them to make a difference in the coming months.

“The outlook is positive,” said Timothy Lynch, senior director of the Morgan Lewis law firm. “There is bipartisan support so there will likely be action sooner rather than later.”

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However, he said the differences between the bills needed to be worked out. And how exactly the resulting sales losses can be offset could be a sticking point.

“The House bill has some ‘pay-for,'” said Paul Richman, head of government and policy officer for the Insured Retirement Institute. “The Senate bill doesn’t contain any, but that could change.”

The Law to Ensure a Strong Retirement – and nicknamed “Secure 2.0” – was unanimously approved by the House of Representatives Law last month by the Ways and Means Committee. Its sponsors are panel chairman Richard Neal, D-Mass., And ranking member Kevin Brady, R-Texas.

The Senate bill – called the Retirement Security and Savings Act and sponsored by Sens. Ben Cardin, D-Md., And Rob Portman, R-Ohio – has not yet received committee attention but is expected in next month, according to a trusted person with the way of the bill forward.

Here are some of the key provisions in the two policies, with their differences, that would affect retirees and retirees.

Debt for student loans and retirement plans

Most companies that offer 401 (k) plans will top your contributions up to a certain amount – e.g. 100% for the first 3% you contribute with 50% for the next 2%. For workers whose student loan debt is keeping them from putting money into their retirement accounts, it means they are missing out on the company’s money.

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Both House and Senate actions would allow employers to contribute to 401 (k) plans (and similar workplace plans) on behalf of employees making student loan payments rather than contributing to their retirement plan.

“The bigger question of how to address student loan debt doesn’t have many bipartisan agreements,” Lynch said. “This would be a step in trying to help.”

Catch-up contributions

According to current law, old-age savers aged 50 and over can make so-called catch-up contributions to their retirement assets. In addition to the standard annual contribution limits – $ 19,500 for 401 (k) plans and $ 6,000 for individual retirement accounts in 2021 – those who qualify can add an additional $ 6,500 to their 401 (k) or 1,000 Deposit US dollars into their IRA.

Both the House and Senate bills aim to increase these amounts, although the details differ somewhat.

The House bill would adjust annual catch-up amounts based on inflation and expand the 401 (k) catch-up process for people aged 62, 63, or 64 to $ 10,000 in catch-up contributions, down from the current $ 3,000.

The Senate bill would also align the IRA amount with inflation, but is more generous with the $ 10,000 catch-up fee of 401 (k): it would apply to anyone aged 60 and over.

The House Bill would also change the tax aspect of make-up amounts to offset lost revenue from other provisions.

This means that all catch-up contributions to 401 (k) plans and the like would be treated as Roth contributions – ie after taxes – from next year. Under current law, employees can choose whether to make these contributions on a pre-tax or Roth basis (provided that their company gives them the choice).

In addition, congruent contributions from employers can currently only be paid to pre-tax accounts. A provision in the House bill would allow them to make post-tax (Roth) contributions if the worker wanted to go that route.

Required minimum distributions

The Secure Act has already been amended to require minimum payouts or RMDs from retirement accounts to start at 70½ years of age or older. Under the new House of Representatives law, these mandatory annual payouts would not have to begin before age 73 in 2022, then age 74 in 2029 and age 75 in 2032.

Similarly, the Senate bill would raise the RMD age to 75 years by 2032. It would also waive RMDs for those with less than $ 100,000 in total retirement assets and reduce the penalty for failing to receive RMDs from the current 50% to 25%. .

Pension changes

One way to create a source of income later in life is through a qualified longevity annuity contract, or QLAC. As soon as you buy the pension, you decide when the income should start.

However, the maximum that can be put into a QLAC is either $ 135,000 or 25% of the value of your retirement account, whichever is lower.

Both bills would remove the 25% cap. The Senate move would also increase the maximum amount allowed in a QLAC to $ 200,000.

“That would allow people to save more in a tax-privileged environment [for use] later in their retirement years, “said Richman.

Additionally, both bills would direct the Treasury Department to enact regulations that would allow exchange-traded funds or ETFs to be investment options in variable annuity contracts. At the moment, it’s not an option due to regulations that were written prior to the creation of ETFs, Richman said.

“It would enable an ETF-structured annuity that would offer consumers a more cost-effective investment option,” he said.

ETFs generally cost less than mutual funds, which are the typical investment offering in variable annuities.

Automatic registration in 401 (k) plans

The House’s bill would require employers to automatically add workers to their 401 (k) plan at a rate of at least 3% and then increase it each year until the worker contributes 10% of their salary. Companies with 10 or fewer employees and new companies (under 3 years of age) are among those who would be excluded from the mandate.

The Senate bill does not require automatic registration, but it does include incentives to encourage companies to implement this feature.

Other things

Both measures would create a national online database of lost property for pension plans that workers may lose sight of after leaving the job.

While the House bill pushes for greater public awareness of what is known as savings credit – a tax credit available to retirement savers on the lower end of the income spectrum – the Senate bill would raise the income limit for those who claim the loan and would increase the repayment to a retirement account.

Under both bills, part-time workers who work 500 hours or more for two consecutive years are eligible to participate in their company’s 401 (k) plan.

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