The Workplace Retirement Savings Plan: Sensitivity to Employee Choice and Employee Electrification and Employer Default Expenditure
The House already passed its own version of retirement plan rule changes, and two key Senate committees passed their own versions. Legislators have been trying to cobble together three bills into a single package called Secure 2.0.
After it’s finalized, one idea is to attach that package to an overall government spending bill that may be voted on by both chambers in Congress before the holidays. But if lawmakers can’t agree on such an omnibus spending bill, Secure 2.0 likely would have to be reintroduced next year for the new Congress’ consideration.
“The House and Senate have been working to come to an agreement and are close to one — the final bill is almost there,” said Democratic Sen. Ben Cardin, who co-sponsored the bill passed by the Senate Finance Committee, in an emailed statement. The question is which vehicle will get it across the finish line. We absolutely need to ensure it is a priority.”
The seven savings provisions that are most likely to be included in a final retirement package were given a closer look by two retirement policy experts who have been following the process closely.
Automatic enroll employees in new workplace retirement savings plans could be required by employers. (It is currently optional for employers to do so.) It would then be up to the employee to actively opt out if they don’t wish to participate.
The Secure 2.0 provision would require employers set a default contribution rate of at least 3% but not more than 10% for the employee plus an automatic contribution escalation of 1% per year up to a maximum contribution rate of at least 10% but not more than 15%.
SECURE 2.0 will help increase savings, ensure greater access to workplace retirement plans and provide more workers with an opportunity to receive a secure stream of income in retirement, according to Thasunda Brown Duckett, president and CEO of TIAA, one of the largest US retirement service providers.
It used to be that when you turned 70-1/2 you had to start withdrawing a required minimum amount from your 401(k) or IRA every year. Then, the age moved up to 72. Beginning in 2023 and continuing for a decade later, it will move up to 73 under the Secure 2.0 package.
Employers would be able to enroll workers in an emergency savings account if they choose to do so, up to $2,500. Workers would contribute into the account with money that has been taxed, and withdrawals would be tax free.
In this case, an employer could add a sidecar account to the retirement account of an employee, so that the employee could make pre-tax contributions for emergencies. That money could be taken directly from their paycheck, just as their 401(k) contributions are.
Currently, if you’re 50 or older you may contribute an additional $6,500 to your 401(k) on top of the $20,500 annual federal limit. The retirement package allows those between ages 60 and 64 to contribute more than $6,500 if they so choose.
To help pay for the cost of the retirement package, however, another provision which would go into effect a year earlier would require anyone with compensation over $145,000 to “Rothify” their catch-up contributions. So, instead of making before-tax contributions up to the catch-up limit, you could still contribute the same amount but you would be taxed on it in the same year. Your contribution would then grow tax free and may be withdrawn tax free in retirement. But the federal government would get the tax revenue from the original catch-up contribution up front.
Only low and middle income people who owe at least $1,000 in taxes can get back half of their retirement savings contribution as a tax credit.
Tax credits reduce your tax liability dollar for dollar. But refundable tax credits mean the filer will get the money even if they had no income tax liability to reduce.
Working Families: An Implication of a Biden-Biden Spending Law for Workers with a Retirement Plan and Student Loans
Part-time workers currently must be allowed to participate in a workplace retirement plan if they have at least three years of service and work at least 500 hours a year. Service time would decrease to two years with the new package.
If they don’t repay the withdrawal, they would have to wait until the three-year repayment period ends before being allowed to make another emergency withdrawal.
Provisions that are meant to make it easier for workers to save for retirement are in a spending bill President Biden is expected to sign this week.
More people are working later in life and are not able to afford Social Security and retirement savings. By 2030, the number of people age 75 years and older who will be working or looking for work is expected to grow by 96.5%, according to the Bureau of Labor Statistics.
“The big ugly fact out there is that since modern recorded history, only about half of workers have ever had a retirement plan,” says Monique Morrissey, an economist with the Economic Policy Institute, referring to savings vehicles like 401(k)s. More than a third of workers have little or nothing.
Bankrate found that, out of the US population, 50% can’t afford more than three months of expenses through an emergency fund.
Workers who have large student loans often choose to reduce their debts rather than save for retirement. A study by Fidelity Investment showed that students’ debts cut into workers’ ability to save adequately for retirement.
Under the new law, starting in 2024, student loan payments would count as retirement contributions and would qualify for an employer’s matching contribution.
The bill would require employers to enroll their employees in the plans. Automatic employee contributions would rise by 1 percent each year until they reach 10%, but not more.