The federal spending package unveiled on Tuesday includes new provisions that would alter how millions of Americans save for retirement, including older people who want to stash away extra money before they stop working and those struggling under the weight of student debt.
Many of the policy changes in the bill, which is expected to pass this week, will extend help to Americans who can already afford to save or have access to workplace plans. But lower- 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 will make it easier for part-time workers to enroll in workplace retirement plans.
“It is really meaningful progress,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center. “We can’t expect Congress to solve all of our nation’s retirement challenges in one piece of legislation, but this includes a host of provisions that will move the ball forward.”
The changes were included in a bipartisan bill, known as Secure 2.0, which was folded into the vast federal spending package that will keep the government running.
The retirement components build upon a series of changes made to the retirement system in 2019, which cleared the way for employers to add annuities to their 401(k) retirement plan and raised the age that retirees are required to begin pulling money from their retirement accounts.
Some retirement policy experts point out that the latest legislation does little to extend access to the tens of millions of Americans who are not covered by retirement plans at work, which, at least for now, is the foundation upon which the American retirement system is built. According to a recent study by AARP, nearly half of private sector employees from 18 to 64, or 57 million people, do not have the option to save for retirement at work. That’s about 48 percent of the total work force, AARP said.
But there are helpful incremental changes, policy experts said, which are particularly noteworthy at a time when Congress is deadlocked on many other issues. In a nod to those struggling with student debt, workers making student loan payments would qualify for employer matching contributions, even if they weren’t making qualifying retirement plan contributions of their own.
“It is shameful that we have to give so much to high earners to get a few crumbs for lower earners,” said Alicia Munnell, director of the Center for Retirement Research at Boston College.
Here’s a quick look at some of the changes. Many of them wouldn’t immediately take effect, but would be enacted in the coming years:
Employers can already enroll their employees in workplace retirement plans if they choose to, which meaningfully bolsters both workers’ participation and savings rates.
But this bill would require employers — at least those starting new plans in 2025 and thereafter — to automatically enroll eligible employees in their 401(k) and 403(b) plans, setting aside at least 3 percent, but no more than 10 percent, of their paychecks. Contributions would be increased by one percentage point each year thereafter, until it reaches at least 10 percent (but not more than 15 percent).
Existing plans won’t need to follow the new rules. Small businesses with 10 or fewer workers, new businesses operating for less than three years, and church and governmental plans are also exempt.
Employers will be permitted to automatically enroll workers into emergency savings accounts, which are linked to employees’ retirement accounts. They can enroll workers so that they set aside up to 3 percent of their salary, up to $2,500 (though employers can choose a smaller amount).
The coronavirus pandemic underscored the importance of emergency savings, the lack of which can force younger workers to pull money out of their 401(k) and related accounts through an existing provision known as a hardship withdrawal. They generally have to pay income tax and a 10 percent penalty when they do so.
Tax-wise, the emergency savings accounts will work similarly to Roth accounts: Workers contribute to the accounts with money that has already been taxed, and withdrawals are tax-free. Employers can match emergency savings contributions, like they do with retirement contributions. Once the account hits its ceiling, excess contributions are returned to the worker’s Roth retirement plan, if they have one, or stopped.
401(k) emergency withdrawals
Workers could make one withdrawal, up to $1,000, annually from their 401(k) and I.R.A.s for certain emergency expenses — and they wouldn’t owe the extra 10 percent penalty, which is typically levied on people taking early distributions, generally before age 59 ½. The rule takes effect in 2024.
Workers could replenish their accounts within three years if they choose, but if they don’t put the money back they’re cut off from any more emergency withdrawals.
Matching contributions for student debtors
Some employers provide a matching contribution on the amount you save in your 401(k) or workplace retirement account — they might match every dollar you contribute, for example, up to 4 percent of your salary. But people with student loans may delay saving for retirement while they focus on whittling down their debt, which means they stand to lose years of free money from their employer.
Starting in 2024, student loan payments would count as retirement contributions in 401(k), 403(b) and SIMPLE I.R.A.’s for the purposes of qualifying for a matching contribution in a workplace retirement plan. The same goes for governmental employers who make matching contributions in 457(b) and related plans.
Workers with low- to middle-incomes of up to $71,000 will receive a greater benefit — in the form of a matching contribution from the government — when they save inside an I.R.A. and workplace retirement plan like 401(k)s.
In its current form, the so-called Saver’s Credit allows individuals to receive up to 50 percent of their retirement savings contribution, up to $2,000, in the form of a nonrefundable tax credit. That means they only receive the money back, up to $1,000, if they owe at least that much in taxes. If they don’t owe any taxes, they don’t receive the benefit.
But starting in 2027, instead of the nonrefundable tax credit — which is paid out in cash as part of a tax refund — taxpayers will receive what amounts to a federal matching contribution that must be deposited into their I.R.A. or retirement plan. It cannot be withdrawn without penalty.
The match phases out based on your income: for taxpayers filing a joint tax return, it phases out between $41,000 and $71,000; for single taxpayers, it’s $20,500 to $35,500 and head of household, $30,750 to $53,250.
Legislation passed in 2019 requires employers with a 401(k) plan to permit 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 of service).
Starting in 2025, the new bill would make part-time workers eligible to participate in employers’ 401(k) retirement plans sooner — now two years instead of three.
People between the ages of 60 and 63 would be permitted to set aside extra funds for retirement. Under the current law, people who are 50 or older (at the end of the calendar year) are allowed to make catch-up contributions that exceed the retirement plan limits for everyone else. In 2023, that generally means they can set aside an extra $7,500 in most workplace retirement accounts.
Starting in 2025, the new rule would increase these limits to $10,000 or 50 percent more than the regular catch-up amount that year, whichever is greater, for people in that age group. (Increased amounts are indexed for inflation after 2025.)
Another change related to catch-up contributions will affect people earning more than $145,000 who use employer-provided retirement plans: Starting in 2024, they will be allowed to make catch-up contributions only to Roth accounts, or those that accept after-tax money (but is withdrawn tax-free). Everyone else — or workers earning $145,000 or less — may continue to choose between pretax accounts or Roths.
Catch-up contributions to I.R.A.’s — $1,000 more for people 50 and over — will be indexed to inflation beginning in 2024.
Required minimum distributions
New rules would allow retirees to delay making withdrawals until they are 73, benefiting largely more affluent households who aren’t relying on the money and can afford to let it sit.
Under the current law, retirees are generally required to begin withdrawing money from their tax-advantaged retirement accounts by age 72 — before new rules were signed into law in 2019, the age had been 70 1/2. These rules help ensure individuals are spending the money down and not simply using the plans to shelter money for their heirs.
But starting next year, these so-called required minimum distributions must start in the year a person turns 73. It would later rise to age 75 starting in 2033.