Senate panel issues final retirement protection bill EARN

The Senate’s retirement protection bill is ready for negotiations with the House for final legislation improving retirement savings provisions, according to the Senate Finance Committee.

The Enhancing American Retirement Now (EARN) Act final text is essentially unchanged from the version passed in June, according to Dan Zielinski of the Insured Retirement Institute. Changes were made to ensure any legislative language that affects existing laws is appropriately identified.

The EARN Act will become part of the Senate’s broader retirement protection package, the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act, and later to be reconciled with the House’s bill, SECURE 2.0.

IRI supports the Senate and House bills broadly, with one small correction, Zielinski said.
“One issue that we’d like to see added during negotiation is a provision to allow protected lifetime income products to be used as Qualified Default Investment Alternatives for retirement plans,” Zielinski said. “But overall, the House and Senate have strong measures that are largely consistent ... Both enjoy overwhelming bipartisan support and we are optimistic that a final measure will emerge and be sent to President Biden by the end of the year.”

The EARN Act includes a provision likely to increase sales of long-term care insurance by allowing retirement plan distributions to pay for LTCi premiums, according to Jesse Slome, director of the American Association for Long-Term Care Insurance.

“The EARN Act allows the use of tax-exempt retirement plan distributions to pay for long-term care insurance premiums,” Slome explains. “Specifically, it excludes such distributions from the gross income of an insured individual up to $2,500 per individual starting in 2024.” Subsequent amounts will be indexed annually to track inflation.

About 60 million Americans have 401(k) plans in place, Slome said. The average 401(k) balance for individuals between ages 55 and 64 is $232,000. The average balance for those 65 and older is $255,000.

“Using a small portion of your retirement plan to protect your full retirement savings will be seen as a very smart financial move,” Slome suggests. According to the Association’s 2022 Long-Term Care Insurance Price Index, a 65-year-old male could pay between $1,700 and $3,135 yearly for future benefits of $296,000 when they reach age 85. Insurance costs more for women.

The tax-exemption benefit will apply to 7702(b) traditional LTC insurance plans as well as those meeting 101(g) IRS provisions. “That’s welcome news for the linked-benefit long-term care policies that meet the 101(g) provisions,” Slome said, adding that not all linked-benefit or hybrid long-term care plans meet these provisions.

Baker Tilly, a CPA advisory firm, examined some of the provisions and compared them with the House’s SECURE 2.0. The EARN Act:

Changes required minimum distributions: Required distributions start at 75 rather than 72, starting 2032. This contrasts with SECURE 2.0 which increases the RMD age to 75 from 72 gradually over a 10-year period. The EARN Act would also reduce the excise tax on a missed RMD to 25% from 50%. The excise tax could be further reduced to 10% if the RMD is taken within the correction period, generally two years.

Expands catch-up contributions: The Act would require catch-up contributions to “certain” employer-sponsored retirement plans to be designated as Roth contributions. IRA catch-up contributions would be pre-tax but only for $1,000 annually vs. $6,500 in employer plans. People at least 50 years old would be allowed $1,000 annually for catch-up, but that amount is not indexed. The annual limit for employer plan catch-ups would increase to $10,000 compared with the 2022 limit of $6,500. In the case of SIMPLE plans, the limit would increase to $5,000 from $3,000. Both limits would be indexed beginning in 2025.

Broadens Roth contributions: The EARN Act, similar to SECURE 2.0, would allow participants in employer plans to receive matching contributions on a Roth after-tax basis. This provision would be effective beginning in 2024. Under current law, employer-matching contributions must be made on a pretax basis.

Allows student loan payments: The EARN act would permit employers to match student loan payments in contributions under a 401(k) plan, 403(b) plan or SIMPLE IRA. Qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee. This provision would be effective for plan years beginning in 2024. SECURE 2.0 has a similar provision but would be effective for plan years beginning in 2023.

Allows earlier part-time worker participation: The EARN Act, similar to SECURE 2.0, would reduce the part-time service requirement to two years, down from three, for workers to contribute to their employers’ 401(k) plans.

Creates automatic-enrollment safe harbor: Unlike SECURE 2.0, the EARN Act would not require 401(k) plans to automatically enroll an employee once the employee is eligible to participate. Instead, the EARN Act would expand the use of automatic enrollment in 401(k) plans by creating a new safe harbor that would exempt the plan for satisfying certain nondiscrimination requirements. The new auto-enrollment safe harbor would have higher deferral and matching contribution rates than the existing auto-enrollment safe harbor plan design.

Expands 403(b) distributions for not-for-profits and educational institutions: The EARN Act would conform hardship distribution rules from 403(b) plans to those that apply to 401(k) plans, permitting greater amounts to be withdrawn for hardship. The EARN Act would also allow 403(b) plans, other than church plans, to participate in multiple employer plans (MEP) or pooled employer plans (PEP) and achieve administrative cost savings.

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].

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Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].