The federal spending package unveiled on Tuesday includes new provisions that would transform the way millions of Americans save for retirement, including older people who want to save extra money before they stop working and those under the burden of… struggling with student debt.
Many of the policy changes in the bill, which is expected to pass this week, will help Americans who can already afford to save or have access to workplace plans. However, low- and middle-income workers will receive a new benefit that amounts to a matching contribution — up to $1,000 per person — from the federal government. Another provision is intended to make it easier for part-time employees to enroll in the company pension scheme.
“This is really significant progress,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center. “We can’t expect Congress to solve all of our country’s pension challenges in one bill, but this includes a variety of provisions that will get the ball moving.”
The changes were included in a bipartisan bill known as Secure 2.0, which was folded into the huge federal spending package that will keep the government running.
The pension components build on a series of changes to the pension system in 2019 that paved the way for employers to include pensions in their 401(k) pension plans and raised the age at which retirees must withdraw money from their retirement accounts.
Some pension policy experts point out that the latest legislation does this little to expand access to the millions of Americans who aren’t covered by retirement plans at work, which is the foundation on which America’s pension system is built, at least for now. According to a recent study by AARP, nearly half of private sector workers aged 18 to 64, or 57 million people, have no way to save for retirement at work. That’s about 48 percent of the entire workforce, AARP said.
But there are helpful incremental changes, policy experts said, that are particularly noteworthy at a time when Congress is deadlocked on many other issues. Alluding to those struggling with student debt, employees making student loan payments would be eligible for employer contributions even if they don’t make their own pension contributions.
“It’s a shame that we have to give high earners so much to get a few crumbs for low earners,” said Alicia Munnell, director of the Center for Research on Retirement at Boston College.
Here’s a quick look at some of the changes. Many of them would not come into force immediately, but would come into force in the coming years:
Employers can already enroll their employees in company pension plans if they wish, which significantly increases both labor force participation and employee savings rates.
But this bill would require Employers — at least those beginning new plans in 2025 and beyond — will automatically enroll eligible employees in their 401(k) and 403(b) plans and set aside at least 3 percent but no more than 10 percent of their paychecks. Thereafter, contributions would increase by one percentage point each year until they reached at least 10 percent (but not more than 15 percent).
Existing plans do not have to follow the new rules. Small businesses with 10 or fewer employees, new businesses less than three years in operation, and church and state plans are also exempt.
Employers may automatically enroll employees in emergency savings accounts linked to employees’ retirement accounts. They can enroll workers to set aside up to 3 percent of their salary, up to $2,500 (although employers can choose a lower amount).
The coronavirus pandemic has underscored the importance of emergency savings, the lack of which can force younger workers to withdraw money from their 401(k) and related accounts through an existing provision known as a hardship withdrawal. They usually have to pay income tax and a 10 percent penalty if they do so.
From a tax point of view, the emergency savings accounts work in a similar way to the Roth accounts: Employees pay money that has already been taxed into the accounts, payments are tax-free. Employers can pool emergency savings contributions like they do with pension contributions, but these would be channeled into the pension side of the plan. Once the emergency account has reached its ceiling, excess contributions will be returned to the employee’s Roth pension plan, if any, or stopped.
401(k) Emergency Withdrawals
Employers might choose to offer employees another emergency savings option: Employees could withdraw up to $1,000 annually from their 401(k) and IRAs for certain emergency expenses — and they wouldn’t owe the additional 10 percent penalty, that is typically collected from individuals claiming early distributions, generally before the age of 59½. The regulation will come into force in 2024.
Workers could top up their accounts within three years if they wish, but if they don’t pay back the money they are barred from further emergency withdrawals for three years.
Matching contributions for student debtors
Some employers match the amount you save in your 401(k) or company pension account—they might match every dollar you put in, for example, up to 4 percent of your salary. But people with student loans can delay saving for retirement while they focus on reducing their debt, meaning they’ll lose years of free money from their employer.
Beginning in 2024, student loan payments would qualify as pension contributions in 401(k), 403(b) and SIMPLE IRAs in order to qualify for a corresponding contribution to a workplace pension plan. The same applies to state employers who make matching contributions in 457(b) and related plans.
Low- to middle-income workers of up to $71,000 receive a larger benefit — in the form of a matching government contribution — when they save under an IRA and company pension plan such as 401(k)s.
In its current form, the Saver’s Credit allows individuals to receive up to 50 percent of their retirement savings, up to $2,000, in the form of a non-refundable tax credit. That means they’ll only get the money back, up to $1,000, if they owe at least that much in taxes. If they owe no taxes, they will not receive the benefit.
But starting in 2027, instead of the non-refundable tax credit — which is paid out in cash as part of a tax refund — taxpayers will receive a matching federal contribution that must be paid into their IRA or retirement plan. It cannot be withdrawn without penalty.
The match is set based on your income: for taxpayers filing a joint tax return, it is set between $41,000 and $71,000; for single taxpayers it is $20,500 to $35,500 and for heads of household $30,750 to $53,250.
Legislation passed in 2019 requires employers with a 401(k) plan to allow longer-term part-time employees to participate, including those with one year of service (with 1,000 hours) or three consecutive years (with 500 hours).
Beginning in 2025, the new law would entitle part-time workers to enroll in employers’ 401(k) plans earlier — now two years instead of three.
Those aged 60-63 could save additional funds for retirement. Under current law, individuals who have turned 50 (at the end of the calendar year) are permitted to make margin contributions that exceed everyone else’s retirement savings limits. In 2023, that generally means they can save an extra $7,500 in most workplace retirement accounts.
Beginning in 2025, the new rule would raise those limits to $10,000, or 50 percent more than that year’s regular catch-up amount, for people in that age group, whichever is greater. (Increased amounts are indexed for post-2025 inflation.)
Another change regarding catch-up contributions will affect people earning more than $145,000 and using employer-provided pension plans: Beginning in 2024, they will only be able to make catch-up contributions to Roth accounts or those that accept after-tax money (but will be withdrawn tax-free ). Everyone else — or workers earning $145,000 or less — can still choose between pre-tax accounts or Roths.
Catch-up contributions to IRAs — $1,000 more for those age 50 and older — will be indexed to inflation beginning in 2024.
Required minimum distribution
New rules would allow pensioners to delay withdrawals until they are 73, largely benefiting wealthier households who don’t need the money and can afford to leave it lying around.
Under current law, retirees are generally required to withdraw money from their tax-deferred retirement accounts by the age of 72 – before new rules came into force in 2019, the age was 70 1/2. These rules help prevent individuals from spending the money and not simply using the plans to protect money for their heirs.
But starting next year, those so-called required minimum distributions must begin the year a person turns 73. It would later increase to age 75 from 2033.