Untitled Document

June 2022

New Proposed 401(k) and Other Pension Law Changes

In June of 2022 the Senate Finance Committee approved proposed tax legislation with the title, “Enhancing American Retirement Now (EARN) Act.” The vote in the committee was unanimous. If approved by the entire Senate, it will need to be reconciled with the proposed legislation as approved by the House of Representatives.

The following law changes would become law. We also offer our comments about these proposed changes. Unless indicated otherwise these changes would be effective for after 2023.

1. Major change #1. All catch-up contributions must go into a designated Roth account. Under current law a 401(k) plan is not required to authorize that a participant may make a Designated Roth contribution. This proposal would require that every 401(k) plan must allow for designated Roth accounts.

Under current law a catch-up elective deferral may go into either a standard 401(k) account or a Designated Roth account. The proposal would require that all catch-up contributions must go into a Designated Roth account.

This change is a revenue raiser since individuals are required to include in their income the catch-up amount since they are not able to invest it in a standard 401(k) account.

2. Major Change #2 participants would have the right to elect to have any employer matching contribution or other type of employer contribution be treated as designated Roth contributions.

Under current law a 401(k) plan is not required to authorize that a participant may make a Designated Roth contribution. This proposal would require that every 401(k) plan must allow for designated Roth accounts.

The proposal would give each participant the right to have some or all employer contributions made into a Designated Roth account.

This change is a revenue raiser since individuals are required to include in their income the catch-up amount since they are not able to invest it in a standard 401(k) account.

3. Extended deadline to establish and fund a new 401(k) Plan for a self-employed person. Under current loan a person cannot make an elective deferral with respect to income already earned. In general, a self-employed person had to complete their elective deferral by January 31 of the following year. This proposal would allow the self-employed person to establish a new 401(k) plan and make their contribution(s) by its tax return due date including a tax extension.

4. 401(k) change for certain part-time employees. Commencing in 2024, the SECURE Act requires a 401(k) to cover part-time employees who have worked at least 500 hours in the preceding 3 years. Such part-time employees are eligible to make elective deferrals. An employer may, but is not required to make a matching contribution for these part-time employees or to allocate to them a standard profit sharing contribution. The proposed law change is that only 2 years be required.

5. Authorization to automatically rollover certain default IRAs. Under current law an employer may close a person’s 401(k) balance if it is less than $5,000. If the person fails to voluntarily close their 401(k) balance, then the plan administrator is required to establish a default IRA. Normally there will be a third party service provider with respect to these defaulted IRAs. The proposal is to allow the service provider to automatically rollover the defaulted IRA into a person’s new employer’s 401(k) plan.

6. The following IRA changes also applying to 401(k) participants
A. EPERS
B. RMD Age Will Increase to age 75 from age 72.
C. Reduce the 50% Tax.
D. Changes in the Disaster Relief Laws.
E. Saver’s Tax Credit Changes -Applying to Those Who Make Elective Deferrals
F. Increase in the Catch-Up Amount for Certain 401(k) Participants Age 60 -63.
G. Most of the new exceptions to the 10% tax.

7. Paying a small bonus so a person will participate in a 401(k) Plan. Under current law this is prohibited. It would be permitted as long as the payment was small. The IRS will need to define.

8. An employer would be able to rely on a participant’s hardship certification unless the plan had some knowledge the hardship conditions were not satisfied.

9. New Method 401(k) Default Enrollment and being deemed to have passed nondiscrimination testing. A plan is deemed to have met the nondiscrimination rules if it has default participation provisions. That is. A participation will be enrolled to commence deferrals unless he oe she expressly opt out.

Default contributions must be at least 6% in the first year and then increase by 1% per year until reaching 10%. The employer would be required to make matching contributions of 100% of the first 2% of elective deferrals, 50% of the next 4% and 20% of the next 4%. So, if a participant deferred 10% then the employer’s matching contribution must be 4.8%.

Under current law, default contributions must be at least 3% in the first year and then increase by 1% per year until reaching 6%. The employer has two choices with respect to its contributions. It can make a matching contribution to those who make elective deferrals. It would be required to make matching contributions of 100% of the first 1% of elective deferrals, 50% of the next 5%. Or, an employer non-elective contribution of 3% of compensation for all participants.

10. The IRS is to issue additional guidance on rollovers. The IRS would need to furnish sample forms.

11. IRS to maintain a data base and assist with missing plan participants and to establish default IRAs for IRAs with a balance less than $1,000. The purpose of the data base is not meant to primarily help plan sponsors, but it is to be used by participants and beneficiaries in recovering lost or unknown plan benefits. When a participant has a vested balance less than $1,000 and fails to withdraw his or her balance then the plan administrator is to send those funds to the US Treasury. It would be treated as if it was an IRA because the US Treasury is not going to establish an IRA.

12. New rules regarding retirement plan overpayments. Under current law the retirement plan is almost always required to recover the overpayment. The law would be clarified to make clear in what situations will it be permissible for the plan not to seek to recover the mistaken payment. And the law would be clarified to make clear in what situations the recipient is still eligible to rollover the overpayment or the mistaken distribution and it will be permissible for the plan not to seek to recover the mistaken payment.

13. Repeal Law Requiring RMDs with Respect to Designated Roth Accounts. The RMD rules applying to 401(k) plans does require there be an RMD with respect to Designated Roth Funds. Such a rule does not apply to Roth IRAs while the Roth IRA owner is alive.

14. A special RMD rule would apply to a surviving spouse. A surviving spouse for purposes of the RMD rules would permit the surviving spouse to elect to be treated as the deceased employee. The IRS will need to clarify.

15. Special rule for certain school loan payments. A 401(k) plan could be written so that a participant who makes a student loan payment is treated as having making an elective deferral so that the employer must then make a matching contribution if such employer was otherwise making such matching contributions. In effect, the person is given credit for making an elective deferral even though they made no elective deferral.