Lawmakers propose bill to improve retirement plans and tax breaks

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The top Democrat and Republican on the tax-writing House Ways and Means Committee introduced bipartisan legislation to encourage more Americans to save for retirement, with increased tax credits and improvements for 401(k), 403(b), IRA and SIMPLE plans.

House Ways and Means Committee chairman Richard Neal, D-Massachusetts, and ranking member Kevin Brady, R-Texas, teamed up Tuesday to introduce the Securing a Strong Retirement Act of 2020, which builds on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 to make further improvements in workers’ long-term financial well-being.

The bill would encourage saving earlier for retirement by enrolling employees automatically in their company’s 401(k) plan, whenever a new plan is created. The legislation would require 401(k), 403(b) and SIMPLE plans to automatically enroll participants in the plans upon becoming eligible. The employees could opt out of the coverage, however. The initial automatic enrollment amount would be at least 3% but no more than 10%. Each year that amount would increase by 1% until reaching 10%. All current 401(k), 403(b) and SIMPLE plans would be grandfathered in. There would be exceptions for small businesses with 10 or fewer employees, new businesses (that is, those that have been in business for less than three years), church plans and governmental plans.

The bill would create a new financial incentive for small businesses to offer retirement plans. The three-year startup tax credit for small employer pension plan startup costs is currently 50% of administrative costs, up to an annual cap of $5,000. Under the proposal, the 50% would increase to 100% for employers with up to 50 employees. Except in the case of defined benefit plans, an additional credit would be provided equal to the applicable percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000.

The bill introduced by House Ways and Means Committee members would let individuals save for retirement longer by increasing the required minimum distribution age to 75.
The bill would let individuals save for retirement longer by increasing the required minimum distribution age to 75.

The bill would increase the existing federal tax credit for contributions to a retirement plan or IRA (the Saver’s Credit). The bill would amend the Saver’s Credit to create a single credit rate of 50% (currently there’s a tiered structure of a 10%, 20% and 50% credit). The bill would increase the maximum credit amount from $1,000 per person to $1,500, as well as increase the maximum income eligibility amount. It would also index for inflation the creditable contribution amount.

“COVID-19 has only exacerbated our nation’s existing retirement crisis, further compromising Americans’ long-term financial security,” Neal said in a statement Tuesday. “In addition to meeting workers’ and families’ most pressing, immediate needs, we must also take steps to ensure their well-being further down the road. With the Securing a Strong Retirement Act, Ranking Member Brady and I build on the landmark provisions in the SECURE Act and enable more workers to begin saving earlier — and saving more — for their futures. This bill will help Americans approach old age with the confidence and dignity they deserve after decades of hard work and sacrifice.”

In addition, the bill would expand retirement savings options for nonprofit employees by allowing groups of nonprofits to join together to offer retirement plans to their employees. It would offer individuals 60 and older more flexibility to set aside savings as they approach retirement. The bill would let individuals save for retirement longer by increasing the required minimum distribution age to 75. It would also allow individuals to pay down a student loan instead of contributing to a 401(k) plan and still receive an employer match in their retirement plan.

“Ensuring Americans have the resources they need for a prosperous retirement is a bipartisan priority — and I’m glad that Chairman Neal and I were able to come together again to build on our work from the SECURE Act,” Brady said in a statement. “Our legislation will make it easier for folks to save, protect Americans’ retirement accounts, and give workers more peace of mind as they plan for the future.”

Moreover, the bill would make it easier for military spouses who change jobs frequently to save for retirement. Under the bill, small employers would be eligible for a tax credit on their defined contribution plans if they (1) make military spouses immediately eligible for plan participation within two months of hire, (2) upon plan eligibility, make the military spouse eligible for any matching or nonelective contribution that they would have been eligible for otherwise at two years of service, and (3) make the military spouse 100% immediately vested in all employer contributions. The tax credit would equal the sum of (1) $250 per military spouse, and (2) 100% of all employer contributions (up to $250) made on behalf of the military spouse, for a maximum tax credit of $500. The credit would apply for three years for each military spouse and would only apply to employees who aren’t earning high compensation already.

Furthermore, the bill would also allow individuals more flexibility to make gifts to charity through their IRAs. It would permit taxpayers to avoid harsh penalties for inadvertent errors managing an IRA that can lead to a loss of retirement savings. Other provisions would protect retirees who unknowingly receive retirement plan overpayments.

The bill would also make it simpler for employees to find lost retirement accounts by creating a national online database of lost accounts.

This article originally appeared in Accounting Today.
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Retirement planning 401(k) IRAs Finance, investment and tax-related legislation Richard Neal Kevin Brady Tax credits
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