On May 5, the House Ways and Means Committee unanimously secured a strong retirement law of 2021. The bill is expected to be voted in the full House later this summer, where it is already seeing strong support.
The new bill, called Protection Act 2.0, is the Protection of 2019 (setting up every community to increase retirement) law, which has expanded the retirement coverage for more Americans. Also, the new bill includes a number of provisions designed to simplify retirement plan administration that will encourage more employers to adopt 401 (k) plans.
The key provisions of the Protection Act 2.0 relating to the 401 (k) plan include:
- Expansion of automatic enrollment. The new 401 (k) plan requires 3% to 10% to automatically enroll employees at a default rate and automatically increase contributions to 1% per year to at least 10% (but not more than 15%). Of course, employees can always change their contribution rate or leave the plan at any time. Existing plans are discounted to grandparents, and new businesses as well as 10 or fewer employees.
- Improved tax credit for small employer plans. The Protection Act provides a three-year tax credit plan for less than 100 employees with up to 50% of the business start-up costs. The new bill increases the credit for employers up to 100% with up to 50 employees. Also, Protection Act 2.0 provides a new tax credit for employers with 50 or fewer employees, encouraging direct contributions from employees. This new tax credit will be as much as 1,000 per participating employee.
- The age has been raised to 75 for the required minimum distribution (RMDs). The Protection Act increased the RMD age to 72 (from 70.5). The new bill further raises the RMD age: 73 in 2022; 74 in 2029 and finally 75 in 2032.
- High catch limit. Catch-up contributions mean older Americans can make additional contributions to their retirement accounts. Under current law, participants aged 50 and over can contribute an additional ,500 6,500 to their 401 (k) plan in 2021. The new bill raises the limit to 1 10,000 for 401 (k) participants aged 62, 63 and 64.
- Ability to match on student loans. The burden of heavy student debt hinders many employees from saving for retirement, often hindering them from achieving valuable mill contributions. Under this provision of the bill, student loan repayments may be treated as an optional delay and may be eligible for a 401 (k) matching contribution from their employer. The bill would allow plans to test these employees individually for compliance purposes.
- Reduction of service requirement period for long-term part-time workers by one year. The 2019 Protection Act allows employers to allow long-term part-time workers to participate in the 401 (k) plan if they work 500-999 hours continuously for 3 years. The requirements for the new bill have been reduced to two years. Keep in mind that qualifications are required for part-time workers. Plans with a normal of 1000 hours in 12 months must allow participants who meet these requirements.
- First year elective defaults for single owners. Thanks to the Protection Act, employers can set up profit sharing plans for the previous year up to their business tax deadline. This allows the owner to share the profits for the previous year so that no employee is suspended. Protection Act 2.0 extends the predefined rules to a single owner or single member LLC, where only one owner is employed. For example, the sole proprietor will be assigned a profit-sharing and 21-year suspension until April 15, 2021.
- Penalty-free withdrawal in case of domestic abuse. The new bill allows victims of domestic abuse to withdraw% 10,000 or less than 100% of their 100% (K) account, without the 10% initial withdrawal penalty. In addition, they will have the power to refund for 3 years.
- Expansion of Employee Planning Compliance Resolution Systems (EPCRs). To alleviate the burden associated with retirement planning administration, this new law will further expand the current amendment system to eliminate further self-correcting errors and inadequacies of planning.
- Individual application of top heavy rules covered by outside workers. The annual non-discrimination test should be made somewhat easier by approving plans to separate certain groups of Safe 2.0 workers from the top heavy test. ADP, ACP, and coverage testing allow for individual group separation.
- Eliminate unnecessary planning requirements related to unregistered participants. Currently, plans are required to send numerous notices to all eligible planning participants. The new law eliminates the need for specific notice.
- Retirement savings are lost and found – Protection Act 2.0 will create a national, online lost and found database. The so-called “absent participants” are often either unresponsive or ignorant of the 401 (k) plan funds that are right for them.