On June 23, 2022, the Senate Finance Committee advanced the Enhancing American Retirement Now (EARN) Act. The bill, which has bipartisan support, builds upon the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. Next, the bill will go to the Senate floor where provisions in a separate bill, the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act, approved by the Senate Health, Education, Labor and Pensions (HELP) panel, may be included. The Senate has not specified a date when it will consider the EARN Act.
The EARN Act is the Senate’s response to the Securing a Strong Retirement Act of 2022 (SECURE 2.0) passed by the House of Representatives in March 2022. Although the Senate and House versions have many similarities, there are some differences which are noted below.
The following highlights the provisions within the EARN Act:
Changes to required minimum distributions
- Tax-preferred retirement savings plans and IRAs are generally required to begin distributions once the account owner reaches age 72. The EARN Act would increase the age at which required minimum distributions must begin to age 75 from age 72 for calendar years starting after Dec. 31, 2031. This contrasts with SECURE 2.0 which increases the RMD age to 75 from 72 gradually over a 10-year period.
- The EARN Act would also reduce the excise tax on a missed RMD to 25% from 50%. The excise tax could be further reduced to 10% if the RMD is taken within the correction period, generally two years.
- The EARN Act would require catch-up contributions to certain employer-sponsored qualified retirement plans to be designated Roth contributions. Although this provision is included in SECURE 2.0, the effective date would be for taxable years beginning after Dec. 31, 2023, rather than one year earlier as in SECURE 2.0. Catch-up contributions to IRAs would continue to be pretax but are significantly less than catch-up contributions to employer-sponsored plans ($1,000 versus $6,500.)
- Individuals who have attained age 50 are permitted to contribute a catch-up contribution to their IRAs. Under existing law, the catch-up amount is $1,000 and is not indexed. This would be effective for taxable years after the date of enactment.
- The EARN Act would allow individuals who have attained ages 60, 61, 62 and 63 during the taxable year to make larger catch-up contributions to their retirement plans. (SECURE 2.0 would apply the larger limit to ages 62, 63 and 64.) The annual limit would increase to $10,000 compared to the 2022 limit of $6,500, and in the case of SIMPLE plans, the limit would increase to $5,000 from $3,000. This provision would be effective for taxable years beginning in 2024. Both limits would be indexed beginning in 2025.
Roth contributions expanded
- Under current law, employer-matching contributions to 401(k) and 403(b) plans must be made on a pretax basis. The EARN Act, similar to SECURE 2.0, would provide participants of these plans with the option of receiving matching contributions on a Roth after-tax basis. This provision would be effective beginning in 2024.
- The EARN Act would also permit employees to elect Roth treatment of contributions to SIMPLE plans and SEP plans beginning in 2024. Currently all contributions to these plans must be made on a pretax basis.
Student loan payments treated as deferrals for purposes of matching contributions
- The EARN act would permit employers to make matching contributions under a 401(k) plan, 403(b) plan or SIMPLE IRA with respect to “qualified student loan payments” as though those payments were elective retirement account deferrals. Qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee. Qualified student loan payments made by the employee could be matched up to the annual elective deferral threshold. The employee would be required to certify to the employer making the matching contribution that the employee actually made the student loan payment; the employer may rely on the employee’s certification. This provision would be effective for plan years beginning in 2024. SECURE 2.0 has a similar provision but would be effective for plan years beginning in 2023.
Period of service requirement reduced for long-term part-time employees in 401(k) plans
- The SECURE Act expanded eligibility to include long-term part-time workers to contribute to their employers’ 401(k) plans who complete three consecutive years of service with at least 500 hours of service in each year. The EARN Act, similar to SECURE 2.0, would reduce the service requirement to two years for plan years beginning in 2023.
New automatic-enrollment safe harbor
- Unlike SECURE 2.0, the EARN Act would not require 401(k) plans to automatically enroll an employee once the employee is eligible to participate. Instead, the EARN Act would expand the use of automatic-enrollment in 401(k) plans by creating a new safe harbor that, if the requirements were met, would exempt the plan for satisfying certain nondiscrimination requirements. The new auto-enrollment safe harbor would have higher deferral and matching contribution rates than the existing auto-enrollment safe harbor plan design. This provision would be effective for plan years beginning in 2024.
- Employers with 100 or fewer employees who maintain the new auto-enrollment safe harbor plan would be eligible for a tax credit on behalf of employees who are not highly compensated employees. The total amount of the credit would be equal to the total of the employer’s matching contributions, not to exceed 2% of the compensation of such employee for the taxable year. This provision would be effective for taxable years which include any portion of a plan year beginning after Dec. 31, 2023.
Higher contribution limits for SIMPLE plans
- Under present law, the annual contribution limit for employee elective deferral contributions to a SIMPLE IRA or SIMPLE 401(k) plans is $14,000. The catch-up contribution limit beginning at age 50 is $3,000. A SIMPLE IRA plan may only be sponsored by a small employer and the employer is required to either make matching contributions of the first 3% of compensation deferred or an employer contribution of 2% of compensation.
- The EARN Act would increase the deferral limit for SIMPLE IRAs and SIMPLE 401(k) plans to $16,500 (indexed) and the catch-up contribution at age 50 to $4,750 (indexed) in the case of an employer with no more than 25 employees. An employer with 26 to 100 employees can provide these higher deferral limits, but only if the employer either provides a 4% matching contribution or a 3% employer contribution. This would be effective for taxable years beginning in 2024.
Retirement plan amendments
- The deadline for making plan amendments required by the SECURE Act of 2019 would be extended to the first plan year beginning in 2024. This is similar to the provision in SECURE 2.0.
403(b) plan enhancements for not-for-profits and educational institutions
- The EARN Act would conform hardship distribution rules from 403(b) plans to those that apply to 401(k) plans, thus permitting greater amounts to be withdrawn for hardship.
- The EARN Act would allow 403(b) plans, other than church plans, to participate in multiple employer plans (MEP) or pooled employer plans (PEP) and achieve administrative cost savings.
- The EARN ACT would permit the owner of employer stock issued by an S corporation to defer 10% of long-term capital gain from the sale of that stock to an ESOP, effective for years after 2027.
Other provisions of interest
- Distributions up to $22,000 from retirement accounts for federally declared disasters without incurring 10% early distribution tax
- Establish a safe harbor related to employee elective deferral corrections
- Expansion of Employee Plans Compliance Resolution System (EPCRS) to allow self-correction of plan loan failures and certain IRA failures
- Repayment of qualified birth or adoption distributions limited to three years
- Premium limitations for qualified longevity annuity contracts (QLAC) are increased and joint and survivor benefits clarified
We encourage you to reach out to your Baker Tilly advisor regarding how the above may impact your tax situation.