Legislative updates

Proposed Bill Would Create Portable Retirement Accounts

Representative Jim Himes (D-CT) and Senator Mark Warner (D-VA) have announced legislation to establish universal, portable retirement accounts. The Portable Retirement and Investment Account (PRIA) Act of 2021 would create such accounts for every American at birth, in conjunction with the issuance of a Social Security number.

The child of any taxpayer who received the earned income tax credit in the tax year prior to establishment of the account would also receive a $500 contribution. Any individual will be permitted to make contributions to their own account throughout their life, except during years in which they are an active participant in an employer-sponsored retirement plan. Annual aggregate contributions will be limited to an amount comparable to the IRA contribution limit imposed under Internal Revenue Code Section 219(b) and catch-up contributions for those age 50 or older.

Employers will be permitted to make direct deposits, apply automatic contribution and automatic escalation features, and make contributions to the accounts of their eligible employees. These employees are limited to anyone

  • whose employer does not maintain a qualified retirement plan,
  • whose employment consists of work (whether or not as an employee) through mobile platforms, or
  • who is not eligible to participate in their employer’s qualified retirement plan.

 

The bill was referred to the House Committee on Ways and Means.


Proposed House Budget Reconciliation Amendment Includes IRA Restrictions

The House Ways and Means Committee has released additional legislative text as part of its tax portion of the anticipated $3.5 trillion budget reconciliation bill. If enacted, the proposal would impose several restrictions on IRAs.

  • Creates a prohibition on Roth or Traditional IRA contributions if aggregate IRA and defined contribution balances exceed $10M, and generally applies to individuals making more than $400–$450k (depending on filing status)
  • For account balances exceeding $10M, provides for a required distribution equal to 50 percent of the amount by which the prior year aggregate balance exceeds $10M—again, for individuals making more than $400–$450K. If the aggregate value exceeds $20M, then the excess is required to be distributed first from Roth IRAs and designated Roth accounts to bring the value to $20M (or deplete Roth assets) after which the individual can choose which accounts to distribute from to satisfy the remaining RMD resulting from having a balance exceeding $10M.
  • Closes the “back-door” Roth loophole by eliminating conversions of all after-tax IRA and after-tax employer plan contributions
  • Eliminates pretax conversions and rollovers to Roth from non-Roth accounts for those making $400–$450k (beginning in 2032)
  • Extends statute of limitations from three years to six years after a return containing an error was filed to allow IRS to pursue IRA noncompliance

The legislation also imposes restrictions on certain types of investments as follows.  Such investments that exist in IRAs at the time of enactment would be required to be divested from the IRA by December 31, 2023.

  • Prohibits investment of IRA assets in a security if the issuer of the security (or other person specified by the Treasury Department) requires the account owner to either
    • have a specified minimum amount of income or assets,
    • have completed a specified level of education, or
    • hold a specific license or credential
  • Prohibits investment of IRA assets in entities in which the owner has a substantial interest (10 percent or more) or is an officer or director of the entity. Constructive ownership of family members applies (spouse, ancestor, lineal descendant, and spouse of lineal descendant).

Other retirement provisions included in the Ways and Means Committee’s portion of the bill were announced last week. After nearly 40 hours of debate and 66 amendments over the course of four days, the legislation was approved by the Ways and Means Committee in a near party-line vote. It now moves to the House Budget Committee for markup.


Early House Budget Reconciliation Text Includes Retirement Reform

The House Ways and Means Committee has released draft legislative text as part of what is currently planned to be a $3.5 trillion tax and spending package. The proposal would require employers without an employer-sponsored retirement plan to automatically enroll their employees in an automatic IRA plan or other retirement arrangement at a rate of at least 6 percent and increasing annually to 10 percent of compensation beginning in 2023. Representative Richard Neal (D-MA) previously proposed such legislation under the Automatic Retirement Plan Act of 2017. The current proposal exempts employers with 5 or fewer employees earning at least $5,000, or those that have been in business for less than 2 years from these requirements. The legislation includes enhancements to credits for small employers to offset plan costs and imposes an excise tax of $10 per participant per day to employers that fail to provide an automatic arrangement.

Additionally, the proposal would modify the saver’s credit to create a refundable tax credit or “saver’s match” of up to $500 (adjusted for inflation), based on a percentage of the contributions made by the taxpayer to a retirement account. The taxpayer would designate on his or her tax return an eligible retirement account for the credit to be funded. Similar proposals have been introduced by Senator Ron Wyden (D-OR) with the Encouraging Americans to Save Act of 2021, and also by Senator’s Ben Cardin (R-MD) and Ron Portman (R-OH) as part of the Retirement Security and Savings Act of 2021.

The House Ways and Means Committee is scheduled to hold markup sessions this week to debate the legislation.


Bill Would Provide Permanent Retirement Distribution Relief for Federal Disasters

Senators Bill Cassidy (R-LA) and Robert Menendez (D-NJ) have introduced legislation that would make permanent certain rules for distributions and loans from retirement plans and IRAs in connection with federally declared disasters. This legislation is intended to aid victims by providing consistent treatment of and improving response times associated with disaster relief.

The proposal follows previous disaster distribution guidance and provides for a waiver of the 10 percent early withdrawal penalty tax on distributions of up to $100,000 per disaster made to those who have a primary residence in the affected area and have sustained an economic loss. The relief would apply to distributions on or after the first day of the incident period of the disaster and within 180 days after the later of either the incident period, the date of enactment, or the applicable disaster declaration. The proposal also allows the taxpayer to treat the distribution as income ratably over a three-year period, as well as to recontribute the distribution to a plan or IRA within three years.

Additionally, the bill would allow recontributions of withdrawals for home purchase or construction in the event that the assets were not used for that purpose. The maximum amount available for a plan loan would also be increased to the lesser of $100,000 or the greater of $10,000 or 100 percent of the nonforfeitable benefit of the participant. A one-year extension of loan repayments would also be permitted for loan payments due on or after the first incident date of the disaster and within the subsequent 180-day period.

The bill was referred to the Senate Committee on Finance. It will be monitored for further developments.


Series of Retirement Security Bills Reintroduced

Senators Cory Booker (D-NJ) and Todd Young (R-IN) reintroduced four bills in the Senate this week designed to address retirement security.

The Refund to Rainy Day Savings Act, originally proposed by Senator Booker in 2019, would permit taxpayers to defer 20 percent of their income tax refund into a “Rainy Day Fund” established by the Secretary of the Treasury. Representative Bonnie Watson Coleman (D-NJ-12) is introducing a companion bill in the House of Representatives.

Senator Booker also introduced the Strengthening Financial Security Through Short-Term Savings Accounts Act of 2021, which was previously proposed by various Senators in prior sessions of Congress. This bill would permit employers to establish stand-alone, short-term savings accounts with automatic contribution arrangements. The account balance will not be permitted to exceed $10,000, adjusted for inflation, and employers will be permitted to establish these accounts in conjunction or coordination with their tax-qualified plan or arrangement.

The Retirement Security Flexibility Act of 2021, previously proposed by Senator Young in 2019, creates additional options for small employers offering nonelective and matching contributions in their 401(k) plans. The bill also makes changes to automatic-enrollment and automatic-increase rules.

The Commission on Retirement Security Act of 2021 would establish an executive branch commission to conduct a comprehensive study of the state of retirement security in the United States and, within two years, submit a report to Congress with recommendations on how to improve or replace existing private retirement programs.

The Retirement Security Flexibility Act of 2021 has been referred to the Senate Committee on Finance, while the other bills have been referred to the Senate Health, Education, Labor, and Pensions Committee.


Proposed Tax Benefits for Retirement Saving Distributions Used for LTC Insurance

Senator Patrick Toomey (R-PA), has re-introduced the Long-Term Care Affordability Act, legislation that would permit tax-free retirement saving distributions of up to $2,500 per year—indexed for inflation—that are used to purchase long-term care insurance. The arrangements to which the legislation applies would include qualified retirement plans, 403(a) and 403(b) plans, governmental 457(b) plans, and IRAs.

These distributions would also be exempt from the 10 percent early distribution penalty tax. The bill would also create new distribution triggers for employee deferral amounts that have been contributed to 401(k), 403(b), and governmental 457(b) plans.

This bill has been referred to the Senate Committee on Finance


Several Health Savings Bills Proposed

Senator Ben Sasse (R-NE) recently introduced two bills aimed at providing more flexibility for the use of health savings accounts (HSAs). Senate bill 2113 proposes to expand permissible distributions from an employee’s health flexible spending arrangement or health reimbursement arrangement to the employee’s HSA. Senate bill 2099 proposes to make HSAs more broadly available by removing the requirement that individuals be enrolled in a high deductible health plan. Further details of these proposals have not yet been made available.

A third bill has been introduced by Senator John Kennedy (R-LA). The Telehealth HSA Act would allow high deductible health plans to provide telehealth services before meeting the plan deductible without affecting HSA eligibility. Currently, employees may need to pay out of pocket for such services.

All three bills have been referred to the Senate Finance Committee for further consideration.


Bill Would Double IRA Contribution Limit for Those Without Retirement Plan Access

Senator John Kennedy (R-LA) has introduced the Increasing Retirement Amount Act to allow individuals without access to a workplace retirement plan to save more for retirement by providing an increased IRA contribution limit of $12,000 per year, subject to annual cost of living adjustments. The special rule would also allow catch-up contributions of up to $3,000 per year for those age 50 or older.

Eligible individuals include workers whose employer did not maintain a retirement plan during the applicable tax year. The current IRA contribution limit is $6,000, or $7,000 for individuals age 50 or older, regardless of taxpayer access to other retirement savings.


Enhancing Emergency and Retirement Savings Act Introduced

Senator James Lankford (R-OK) and Senator Michael Bennet (D-CO) have introduced the Enhancing Emergency and Retirement Savings Act of 2021 to provide flexibility and access for those who experience unexpected emergencies.

The legislation would provide a penalty-free “emergency personal expense distribution” option from employer-sponsored retirement plans and IRAs. The proposal would allow for one emergency distribution per calendar year of up to $1,000 from the individual’s total nonforfeitable accrued benefit under the plan. The bill requires that the withdrawn funds be paid back to the plan before an additional emergency distribution from that same plan is allowed. The amount can be recontributed within a three-year period to any eligible plan to which a rollover contribution can be made.

An emergency personal expense distribution is defined as a distribution for purposes of meeting unforeseeable or immediate financial need relating to necessary personal or family emergency expenses. The plan sponsor of an employer-sponsored retirement plan may rely on an employee’s certification that the conditions are satisfied in determining whether the distribution is an emergency distribution.