Lawmakers from both parties have been working since March to make it possible for employees to increase and enhance their retirement savings. Seven bills introduced in both chambers, including one in the Senate known as the Retirement Enhancement and Savings Act of 2018 (RESA), signal a desire on the part of some members of Congress to make what could be some of the most significant changes to workplace retirement plans since 2006.
Republicans in the House of Representatives have introduced legislation (also titled the Retirement Enhancement and Savings Act of 2018) that mimics the Senate legislation. Rep. Kevin Brady of Texas, chairman of the House Ways and Means Committee, wants to include retirement savings language as part of House Republicans' second tax reform push ("Tax Reform 2.0")
Improve Multi-Employer Pension Plans (MEPs)
MEPs allow small companies to share (and thereby reduce) administrative costs, resulting in lower costs and thereby higher investment returns for employees. Current law requires employers who band together to offer their employees 401(k)-type retirement plans to have a connection, such as being a part of the same industry. RESA would eliminate this requirement, as well as a provision that jeopardizes the entire plan should one member-employer violate the law.
Facilitate 401(k) Plan Annuities and Annuity Information
Traditional pension plans typically offer an annuity option that creates a lifetime income stream for the employee. This is not true for most 401(k) plans. Under RESA, companies would be protected from lawsuits in the event that an annuity provider goes out of business or otherwise fails to live up to its agreement. An additional provision of RESA would require benefit statements to include lifetime income estimates at least once per year. Finally, RESA improves the portability of these annuities for employees who change jobs. Under the current law, participants can be charged a surrender fee when switching employers. (For more see: Should Your 401(k) Be In An Annuity?)
Expand Tax Credits to Offset Costs of Starting and Amending a Retirement Plan
Companies that start a new retirement plan for employees currently receive a $500 tax credit. RESA would increase that to as much as $5,000 for three years. The credit would apply to new 401(k) plans as well as SIMPLE IRA plans. An additional $500 credit for up to three years would be made available to plans that add automatic enrollment, even if the they are already established. Of course, employees would still be able to elect not to participate. (For more see: Tax Credit for Plan Expenses Incurred by Small Businesses)
Create Retirement Savings Incentives for Graduate Level Students
One section of the bill would allow graduate and postdoctoral level students to treat certain taxable non-tuition fellowship or stipend payments as compensation for IRA purposes. This would increase the amount students could contribute to their own IRA. Currently, taxable non-tuition payments are not considered income.
Allow People Older Than 70.5 to Contribute to an IRA
RESA would also remove barriers for people over the age of 70.5 who are currently not permitted to contribute to traditional IRAs even if they are still working. The legislation would allow anyone of any age with earned income to contribute to a traditional IRA. (Contributions to a Roth IRA are already premitted for those over 70.5.)
Additional Provisions of Tax Reform 2.0
Although the main thrust of the House GOP tax proposal extends last year’s tax cuts beyond their 2025 expiration date, some parts of the package deal with retirement savings and incentives. (For more on tax reform see: How the GOP Tax Bill Affects You.)
The legislation under discussion could:
Create A New Family-Friendly Universal Savings Account (USA)
The proposed Universal Savings Account would give families incentive to save for retirement but allow emergency withdrawals. This would theoretically encourage families to begin putting money away for retirement earlier, as the money could also serve as a rainy-day savings account. The USA would be a Roth-style savings account that would grow tax-deferred and levy no taxes or penalties on withdrawals no matter when the money came out.
Provide A New Infant Savings Plan Option
This provision would let families access funds in retirement accounts penalty-free upon the birth (or adoption) of a new child. Funds could be returned to the accounts at some point in the future. Initial information does not indicate whether the withdrawals must be used for medical expenses or could include things like clothing, furniture or other items.
In addition to bipartisan, bicameral support, RESA has been applauded by some financial-services companies, economists, think tanks, and AARP. The lifetime income related proposals have attracted praise from Dirk Kempthorne, president and CEO of the American Council of Life Insurers and from the Insured Retirement Institute, which lauded the bill for helping retirement savers make better informed decisions about their finances.
While it’s unknown what, if any, legislation will successfully make it to the president’s desk this session, anything that makes it easier for people to save for retirement would find few detractors on either side of the aisle.