The House of Representatives passed legislation that would bring substantial changes to the U.S. retirement system, making it easier for employers to offer 401(k)-type plans and include annuities, which guarantee an annual income, as options for workers.
Backed by a bipartisan group of lawmakers including Rep. Richard Neal (D., Mass.), chairman of the House Ways and Means Committee, the legislation would repeal the age cap for contributing to traditional individual retirement accounts, currently 70½. It would also increase the age to start taking required withdrawals from 401(k)s and IRAs to 72 from 70½.
The House bill, known as the Setting Every Community Up for Retirement Enhancement, or Secure Act, passed with a vote of 417-3. A Senate GOP aide said the plan is for the Senate to vote on the House’s Secure Act, rather than its own version, and Sen. Rob Portman (R., Ohio), a Finance Committee member who is active on retirement policy, said the Senate should swiftly pass the House bill.
“The House-passed legislation is very similar to the Senate bill, and I’m working with Chairman Grassley to get legislation signed into law as soon as possible,” said Sen. Ron Wyden (D., Ore.) a co-sponsor of the Senate’s retirement bill.
Lawmakers have been discussing many of the retirement changes for years, and the Senate may be poised to pass this bill quickly and send it to President Trump’s desk. The Trump administration hasn’t taken a formal position on the bill, but lobbyists who support it say they expect the president to sign it into law.
The changes would be the most significant to retirement plans since 2006, when Congress made it easier for employers to enroll workers automatically in 401(k)-type plans and invest their money in funds that shift from stocks to bonds as people age.
Though commonly offered by traditional pension plans, annuities are not often used in 401(k) plans, in part because employers worry that if they pick an insurance company that ends up going bust, the 401(k) participants will sue the employer. The bill passed Thursday would encourage 401(k)-style plans to offer annuities by giving certain employers some protection from future liability if they choose an insurance company to administer the payments, and that insurer later fails to pay claims.
By helping participants convert their balances into a steady lifetime income, annuities enable employers to incorporate a feature of the old-fashioned pension plan in the 401(k) that ensures participants won’t outlive their money. The bill would also allow workers whose employers stop offering annuities to transfer those contracts to The legislation would also require employers to disclose to employees on 401(k) statements the amount of sustainable monthly income their balance could support—a feature aimed at helping employees better understand how much spending their savings will support throughout retirement. As the population gets older and life expectancy rises, policy makers and companies are realizing 401(k) plans could do more to address the needs of retirees to make their money last.
The legislation would allow parents to withdraw as much as $10,000 from 529 education-savings plans for repayments of some student loans. In addition, parents could take penalty-free distributions from retirement accounts of up to $5,000 within a year of the birth or adoption of a child to cover associated expenses.
To help pay for the changes, the House legislation would require many people who inherit tax-advantaged retirement accounts after Dec. 31, 2019, to withdraw the money within a decade and pay any taxes due. That change would generate $16 billion in additional revenue over the next decade, according to the congressional Joint Committee on Taxation. The bill exempts some beneficiaries, including surviving spouses and minor children. Currently, beneficiaries can often liquidate those accounts over their own lifetimes and stretch out tax payments, a technique known as “Stretch IRA.”
The bill also allows employers without an affiliation to band together to offer a 401(k)-type plan—an effort to encourage companies without retirement plans to offer them. Under such arrangements, companies can shift some of the administrative burden and fiduciary responsibility for a retirement plan to a plan administrator. That expands a current-law rule that allows such multi-employer plans but only when employers have a common characteristic.
Consumer advocates have raised concerns about some of the annuity provisions.
While the legislation would protect employers from liability if they select an insurer licensed by the state in which the company is domiciled, Barbara Roper, director of investor protection at the nonprofit Consumer Federation of America, said Congress should also require employers to consider insurers’ financial-strength ratings and make it clear that the employer has legal liability for negotiating the annuity’s price and other terms.
Mark Iwry, who oversaw national retirement policy in the Treasury Department during the Clinton and Obama administrations, said he expects employers to gradually embrace annuities.
While some employers “have a serious interest in providing annuity options to their workforce,” he said, a larger number will initially “do nothing.” But over time, he predicts, the legislation will encourage more to add annuities on either a standalone basis or within funds that serve as default 401(k) investments.
Congress may take up other retirement-related proposals later this year. One bill, proposed recently by Mr. Portman and Sen. Ben Cardin (D., Md.), would give employers incentives to increase the standard minimum default contribution rate under auto-enrollment to 6% from 3%. It would also permit employers to make matching contributions to the 401(k) accounts of employees paying off student loans and don’t contribute enough to the 401(k) plan to receive a full match. It would also enhance a tax incentive for workers who have little to no income tax liability to contribute to a 401(k) or IRA and allow the government to deposit their tax credit into a retirement account.
Mr. Neal is expected to reintroduce a bill that would require most businesses that don’t have a retirement plan to offer one that automatically enrolls employees.
The House bill also repeals a 2017 change to the so-called Kiddie Tax that often boosts tax rates on “unearned” income received by children in low- and middle-income families and was causing surprise tax increases for many. The measure allows affected taxpayers, including thousands of families of deceased active-duty service members, to retroactively elect not to pay the tax. The measure would also benefit survivors of first responders, children who receive certain tribal payments and college students receiving scholarships.
The inclusion of the Kiddie Tax changes helped accelerate the retirement bill through Congress, because lawmakers were united in trying to resolve a problem for military families before Memorial Day.