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Top House tax writers unveil retirement savings proposal

Package includes expanded saver’s credit for lower-income households, adjusts the age for minimum distributions from 401(k)s

House Ways and Means Chairman Richard E. Neal, D-Mass., top left, and ranking member Kevin Brady, R-Texas, released the large, bipartisan bill in the rancorous week before an election.
House Ways and Means Chairman Richard E. Neal, D-Mass., top left, and ranking member Kevin Brady, R-Texas, released the large, bipartisan bill in the rancorous week before an election. (Tom Williams/CQ Roll Call file photo)

House Ways and Means Committee leaders introduced a long-awaited bipartisan collection of retirement savings incentives on Tuesday, building off another sweeping package enacted late last year. 

The new proposal, intended to lay the groundwork for action next year if not in a postelection lame-duck session, would among other things expand and enhance the saver’s credit for lower-income households.

The bill would also increase the age for required minimum distributions from 401(k)s and other tax-favored retirement plans from 72 to 75 years old, adding options for older savers wrestling with weak stock market returns and low interest rates amid the coronavirus pandemic.

The 132-page draft bill won plaudits from financial services associations, and its inclusion of provisions from a Senate bill foreshadows bicameral support for the package.

In one long-sought change, the bill would allow employees to count student loan repayments toward their employers’ matching contribution for a retirement account. The IRS in 2018 ruled that health care products company Abbott Laboratories could offer such a plan to its employees, which the legislation would codify and incentivize other companies to do the same.

Other provisions would require employers offering a new retirement plan to automatically enroll eligible employees; boost limits for catch-up contributions to retirement plans by workers who have reached age 50 from $6,500 a year to $10,000; and enhance an existing tax credit for small employers starting a workplace plan sweetened by a new tax credit of up to $1,000 per employee.

The “baby boomer catch-up” provision, which increases how much people who have reached 50 years of age can contribute to their plan, is a welcome feature, said Paul Richman, chief government and political affairs officer at the Insured Retirement Institute. “According to our research, 45 percent of baby boomers have zero retirement savings,” he said.

The stall in retirement savings due to unemployment related to COVID-19 should prompt House members to consider the legislation during the upcoming lame-duck session, Richman said. “I don’t know if they’re going to act on it, but we’re going to do our best to make the case about why they need to act on it,” he said.

House Ways and Means Chairman Richard E. Neal often points to statistics showing 55 million Americans have no access to a workplace retirement plan. There are an estimated 10,000 people each day who become eligible for Social Security, and many will face a retirement dependent mainly or wholly on Social Security’s average benefit of $1,514 a month.

“COVID-19 has only exacerbated our nation’s existing retirement crisis, further compromising Americans’ long-term financial security,” Neal, D-Mass., said in a joint release with the panel’s ranking member, Kevin Brady, R-Texas. “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,” Brady said.

Never mind the politics

Releasing a large, bipartisan bill in the rancorous week before an election makes for interesting timing. Both Neal and Brady confirmed in late September that they had reached broad agreement on a package, although staff noted that there were still details to be ironed out.

Brady had said he expected the bill could be concluded by late October. Neal suggested it could be done before the election, particularly if members remained engaged in negotiating a coronavirus relief deal with the White House.

While it’s possible that the measure could be tacked on to a lame-duck legislative vehicle, like a COVID-19 package or omnibus spending bill, it seems unlikely at this point given that the retirement proposal has only now arrived on the scene.

That’s in contrast to a retirement savings plan that Neal and Brady collaborated on last year that sailed through the House on a 417-3 vote in May 2019. That bill floundered for months in the Senate because of various “holds,” but congressional leaders overcame those objections by rolling the measure into a year-end spending bill.

Last year’s retirement package included two dozen provisions. The highest-cost measure, at $8.9 billion over 10 years, was increasing the age for required minimum distributions from 401(k)-type plans from 70 1/2 to 72 years of age.

The prior age limit had been unchanged since 1986, and with increased life expectancy and longer working years, lawmakers decided it was prudent to allow savers to let their accounts build up larger balances. Neal and Brady’s new bill would boost the so-called RMD another three years, to 75.

Another provision in the 2019 law relaxed rules for small companies to band together to form multiple employer plans even if they don’t share a common industry. The American Council of Life Insurers estimated that those incentives would bring access to a workplace plan to 600,000 to 700,000 workers initially. The new bill expands an existing tax credit and adds a new one to defray the startup costs for small businesses launching new plans.

Many of the provisions in what the authors have dubbed “Retirement 2.0” draw heavily from two sources: a package Neal introduced in the 115th Congress and a current bill backed by Sens. Rob Portman, R-Ohio, and Benjamin L. Cardin, D-Md. The Portman-Cardin bill, as it is known, was first introduced in the 115th Congress.

Portman said in a statement that the Neal-Brady package would “build upon the success” of last year’s legislation. “Many of the provisions in this legislation have been under consideration by the Senate for years,” Portman said. “I’m particularly pleased that this legislation includes provisions I’ve championed with Sen. Cardin to help Americans take the first step towards their retirement.”

One thing the new bill will not include is Neal’s favored retirement savings solution, a group of provisions centered on a mandate for businesses with more than 10 employees to offer a workplace retirement savings plan.

The ACLI, which backs Neal’s proposal, estimates that the mandate would add 22 million Americans to workplace plans. Lobbyists following retirement issues say they expect Neal to pursue that legislation next year if Democratic presidential nominee Joe Biden wins the White House.

Even without that provision, ACLI was quick to endorse the package introduced Tuesday. The proposal “reflects many important bipartisan priorities, and we look forward to continuing to work with them to strengthen Americans’ financial footing,” ACLI CEO Susan Neely said in a statement.

Saver’s credit

The bill’s expansion of the so-called saver’s credit offers a meaningful incentive for lower-income households struggling to build nest eggs.

Neal and Brady are proposing a flat 50 percent credit, capped at $1,500, for retirement plan contributions. Currently, the credit tops out at $1,000 and is tiered based on income thresholds that max out at $32,500 for individuals and $65,000 for married couples filing jointly in 2020.

The full 50 percent credit under the Neal-Brady bill would be available to all eligible households, including single filers earning up to $40,000 annually and joint filers making up to $80,000; the credit would phase out completely at $60,000 and $100,000 in income, respectively. 

Other provisions in the bill would:

  • Allow employers who offer 403(b) plans, which cater to public school teachers and tax-exempt organizations, to band together to share costs.
  • Permit small employers who join a multiple employer plan to get startup cost tax credits for three years, fixing a glitch that would limit a small employer to only one year of tax credits if it joined a so-called MEP that was 2 years old.
  • Allow certain 403(b) plans to invest in collective investment trusts in which plans pool their money to better diversify their portfolios.
  • Provide a tax credit to small employers if they make newly hired spouses of military members eligible for retirement plan participation within two months, make them eligible for matching contributions available for those with two years of work, and ensure they are 100 percent vested in the plan immediately.
  • Allow employers to provide small immediate incentives, such as gift cards, to encourage employees to contribute to their 401(k) plan.

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