Nestled inside the $1.7 trillion government spending bill, which has passed Congress and is headed to President Biden's desk for a signature, is a suite of significant reforms to the private retirement system.
The changes to come will push businesses to get more of their employees enrolled in savings plans and also give current retirees a break. The bill also has provisions that help people saddled with student loans, military spouses, part-time workers who are eager to save for retirement.
Many of the changes — totaling $53 billion — begin next year with supporters hoping it will help avert what many call a burgeoning retirement savings crisis in the U.S., especially among poorer Americans who are too often left out of the system altogether.
“This is historic,” House Ways and Means Chairman Rep. Richard Neal (D-MA) said on Thursday, adding that the new rules will help provide Americans with “considerable independence down the road.”
Neal was one of many lawmakers behind the bill alongside figures like Rep. Kevin Brady (R-TX), Sen. Ron Wyden (D-OR), Sen. Mike Crapo (R-ID), and others. The bill was finalized over two years of debate across multiple congressional committees in what all sides are hailing as a model of bipartisanship.
“As the economy deals with the effects of the worst inflation in nearly 40 years, working families need all the help they can get when it comes to saving for the next chapter in their lives and we are now one step closer to making that possible,” Sen Rob Portman (R-OH) added this week.
Here are a few of the key provisions from the bill.
Breaks for current savers
The bill is a follow up to 2019’s SECURE Act, which represented the first major retirement legislation since 2006.
One closely watched provision will change the age when people must start taking mandatory distributions from their private retirement plans. The SECURE Act increased the so-called RMDs from age 70 to its current level of 72. Now, the requirement will rise again to 73 starting on Jan. 1, 2023 and then up to 75 in 2033.
The new rules reflect the fact that Americans are living longer and increasing the age allows them to hold their money tax free for longer and keep earning returns.
Some want Congress to go even further in the years ahead. Rep. Brady said in 2020, during an event simulcast on Yahoo Finance, that “my goal is to get rid of it completely.”
The bill also increases the so-called “catch-up” contributions that are allowed for older savers who are behind on savings and want to put extra money away in their final working years. Those provisions will kick in in 2024.
Provisions to get more people to save
Another giant swath of the bill includes a variety of attempts to prod businesses to get more people enrolled into retirement plans.
The key provision, according to many lawmakers, is the new rule around automatic enrollment.
It is the first section of the bill and will mandate businesses to automatically sign up new employees for the employer-sponsored a retirement plan (if one is offered) as part of the onboarding process. The rule would take effect in 2025 and would apply to businesses that offer a 401(k) or 403(b) plan.
New hires could opt out, but the default would be savings. Studies have shown that employers with auto-enrollment retirement plans have much higher rates of participation.
“We've decided to begin with automatic enrollment and make it difficult to opt out,” Rep. Neal said. “I think automatic enrollment is a big deal for eligible participants.”
There are also a host of sections in the bill focused on small businesses, which have a harder time offering retirement plans because of their size. These employers will access to startup tax credits and new inducements to pool their resources into multi-employer plans in the years ahead.
The bill also aims to help part-time employees at companies of all sizes. These employees often have to wait three years before they can enroll in a retirement plan. The new rules lessen the wait to two years beginning in 2025.
All told, Chris Littlefield, the president of retirement and income solutions at Principal, estimates that "SECURE 2.0 will help generate approximately $40 billion in retirement savings for new participants over the next 10 years."
Novel ideas around student loans and emergency savings
Also in the bill is treating student loans as deferrals for the purpose of retirement savings. What that means in practice is that student loans and retirement savings will now effectively be linked if an employer chooses to offer the benefit.
Beginning in 2024, an employee could pay their student loan, but in the process earn a “match” from their employer with that money heading into a 401(k) or 403(b) or SIMPLE IRA account.
There is also a similar idea in the bill around linking retirement and emergency savings. Employers could offer their employees an option of putting money into an emergency fund alongside their retirement account. Employees would be able to save up to $2,500 in an emergency fund — which they can tap anytime — with extra savings and possible matches going toward retirement.
Another part of the bill would make it easier for people to access their existing retirement plans for emergencies without paying the onerous tax penalties that often come with withdrawing early. The bill provides an “exception for certain distributions used for emergency expenses,” according to a summary of the legislation.
“I’ve heard from so many people who had to raid savings meant for the future, not to mention countless others who have never had access to an employer-sponsored retirement plan," Sen. Patty Murray (D-WA), the chair of the Senate’s HELP committee, said this week. “That’s why these reforms are so important.”
As for the big picture, “there's some folks that have been left on the sidelines of the retirement savings game,” American Council of Life Insurers Vice President Kathleen Coulombe recently told Yahoo Finance Live. She represents one of many outside groups that helped push the bill over the finish line.
“It really seeks to help a lot of these vulnerable populations,” she said.
Other notable parts of the soon-to-be law
Other changes coming soon include updates to the SAVERS credit to make it more generous and increase awareness of the benefit. The credit allows certain lower-income workers to get additional tax breaks when they save for retirement.
Another provision aims to make it easier for military spouses who sometimes are not employed long enough to be eligible to save to quickly join a workplace savings plan when they enter or re-enter the workforce. The provision also offers a tax credit of up to $500 to help these spouses jumpstart their savings.
Another top-line provision would create a national “lost and found” database run by the Department of Labor for retirement accounts. Sen. Elizabeth Warren (D-MA) pushed this provision alongside Sen. Steve Daines (R-MT), and she said this week that the provision will “make it easier for Americans to keep track of their retirement savings and for employers to connect their former employees with the accounts they have left behind.”
What the bill won’t address is the challenge of Social Security, which could run low on funds as early as 2034. But lawmakers have long been wary of any changes to Social Security itself, often referred to as “the third rail of American politics.”
Ben Werschkul is a Washington correspondent for Yahoo Finance.
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