Federal Legislation on Retirement Savings
In a bitterly divided Washington, there are few issues on which Republicans and Democrats can find common ground these days. But one issue that has attracted bipartisan support is retirement savings.
Bipartisan retirement savings legislation is currently moving through Congress and stands a chance at becoming law this year. Legislation recently was approved by the House of Representatives, and optimism is high that the Senate will approve the bill this summer.
In the House, lawmakers approved the “Setting Every Community Up for Retirement Enhancement Act,” known as the SECURE Act, on May 23rd by an overwhelming 417-3 margin. That legislation could be taken up by the Senate in early June, though timing is always uncertain in the unpredictable political atmosphere of the nation’s capital.
The House bill is notable for a provision that would increase the age at which individuals must begin taking “required minimum distributions (RMDs)” from their retirement accounts to age 72 from age 70½. The current rules for required minimum distributions have been in place for
more than 15 years, during which time life expectancy has changed and people are working longer. The proposed rule change is intended to reflect those changing societal realities.
The Senate bill, the Retirement Enhancement and Savings Act, or RESA, was introduced in early April. The Senate bill does not include a change in the required minimum distribution age; that is one of the key issues that will need to be reconciled between the two bills.
Both bills would lift the long-standing prohibition on contributions to a traditional Individual Retirement Account (IRA) after the age of 70 ½. It’s an important opportunity for retirees to continue setting aside money for the future.
Here’s an overview of some of the key provisions of the two bills:
House Bill (H.R. 1994)
Senate Bill (S. 972)
Required minimum distributions
Increases the age at which individuals must begin taking requirement minimum distributions
No similar provision
Maximum age for traditional IRA contributions
Repeals the prohibition on contributing to a traditional IRA after the age of 70½
Long-term, part-time workers in 401(k) plans
Permits part-time workers who have worked at least 500 hours in three consecutive years to be eligible for employer plan
No similar provision
Allows penalty-free withdrawals from retirement plans for birth or adoption expenses
No similar provision
Lifetime income disclosure
Requires benefit statements to include lifetime income disclosure at least one a year that illustrates the monthly payments participant would receive based on current account balance
Inherited retirement accounts
Upon death of the account owner, distributions to individuals must be made within 10 years. Exceptions for surviving spouse, disabled individuals, individuals not more than 10 years younger than account owner, and minor children
Upon death of the account owner, distributions to individuals must be made within five years. Same exceptions as House bill, with an additional exception for each beneficiary up to $400,000
Open multi-employer plans
Makes it easier for small businesses to band together to offer retirement savings opportunities to their employees by removing barriers in current law
Small employer automatic enrollment credit
Provides a $500 tax credit for three years for new 401(k) and SIMPLE IRA plans that include automatic enrollment
Outlook for the Legislation
Typically, the two chambers would each pass its own version of the legislation, and then a conference committee of members of the House and Senate would meet to negotiate the details of a final compromise bill. Once the House and Senate pass an identical compromise, the legislation would go to the president to be signed into law.
However, there is momentum in this case for the Senate to simply pass the House bill in its current form, which would allow the bill to go directly to the president. In fact, Senate leaders attempted to bring the bill up for consideration on May 23rd and pass it unanimously. But two senators objected, and the Senate departed for the week-long Memorial Day recess without a vote.
Reports in Washington are that staff from the House and Senate are working now to address the concerns of the two senators who objected. Leaders in both chambers are hopeful that can be accomplished in the weeks ahead, with an eye toward finalizing the bill before the July 4th holiday break.
If a final retirement savings bill is approved by Congress, its provisions would become effective on January 1, 2020.
We are actively monitoring the legislation and will provide additional insight into impacts to individual investors once it is passed into law.
Sources: Charles Schwab, House Ways and Means Committee, Senate Finance Committee