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What the Rise and Shine Act means for your emergency savings and 401(k)

By:

Aaron Morris

It has become more evident that an increasing number of retirees rely solely on Social Security, thus lack adequate savings to survive a catastrophic event. In a previous article, we highlighted the SECURE Act 2.0’s provisions which enhance the original components of the SECURE ACT, ramping up incentives for employers who provide access to retirement savings programs while encouraging employees to save for retirement. The Secure Act 2.0 bill is expected to pass later this fall. The bill will be merged with the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act.

The RISE & SHINE Act builds off the SECURE ACT 2.0, addressing additional expenses incurred by providing access to a retirement plan, increasing access for employees that the previous provisions may have overlooked, and offsetting financial emergencies that may disrupt retirement savings.

The provisions include the following:

  1. Implementing a retirement plan has costs associated with the plan; as the plan participation increases, additional compliance procedures must be met. Plan assets may cover these incidental plan design expenses.
  2. When a participant terminates employment, many leave their retirement balance in the plan. Currently, employers may distribute balances of up to $5,000 to the former employee without their consent. The Act raises the limit on mandatory distributions from $5,000 to $7,000.
  3. Plan sponsors may provide more significant pay credits for older, longer-tenured employees.
  4. With every Act passed, additional participant notifications are added to a host of required notifications. The Treasury and Labor Department may permit plan sponsors to consolidate required participant notifications.
  5. The initial versions of the Acts did not include individuals residing on tribal lands. The intended provisions recognize the sovereignty of tribal courts by allowing them to issue Qualified Domestic Relations Orders or QDROs.
  6. A provision has also been added directing the department of labor to research the effects of inflation on retirement accounts.
  7. Environmental, Social, Governance (ESG) or non-pecuniary factors may not be the sole criteria a fiduciary may use when selecting investment options. Fiduciaries are to only act in the best interest of the plan participants.
  8. Currently, there are limits to the types of investments allowed within a retirement plan and a self-directed brokerage account. An investment advisor is required to create a self-directed account. An advisor is bound to the standards of a fiduciary. Therefore, the limitation on types of investments allowed in self-directed brokerage accounts should be removed.
  9. Volunteer firefighters and emergency medical service workers may join governmental retirement plans.

These provisions are being combined with the existing SECURE ACT 2.0 to be approved later this year. As a refresher, the current provisions are as follows:

Retirement Plan Participation Incentives:

  1. 401(k), 403(b), and SIMPLE plans would be required to automatically enroll eligible participants to a minimum of 3% contributions, but no more than 10% unless employees opt out. Each year, the amount would increase by 1% until reaching the maximum of 10%. The automatic enrollment and auto-escalation provisions increase participation among younger, lower-paid employees and help reduce the racial gap in participation rates, according to an Ariel Aon-Hewitt Study.
  2. The Saver’s Tax Credit rate increases to 50% of what you contribute to the plan, increase the maximum credit amount from $1,000 to $1,500 per person, and raise the maximum income eligibility amount indexed to inflation.
  3. Under current law, the limit on IRA contributions is increased by $1,000 (not indexed) for individuals who have attained age 50. The legislation would index IRA catch-up limit contributions beginning in 2022.
  4. Currently, employees aged 50 and older can make catch-up contributions up to $6,500 to retirement plans except in the case of SIMPLE plans, where the limit is $3,000. For employees ages 60 and older, the new legislation would increase these limits to $10,000 and $5,000 (both indexed to inflation).

Plan sponsor tax credits and enhancements:

  1. The proposed legislation would allow 403(b) plans to participate in Multiple Employer Plans (MEPs), generally following MEP rules under The SECURE Act rules.
  2. For small businesses with 50 or fewer employees, the SECURE Act 2.0 legislation would boost the existing tax credit from 50% to 100% of plan start-up costs, capped at $5,000 per employer for each of the first three years or $15,000. With SECURE 2.0, the credit would eventually become available for companies with between 50 – 100 employees.
  3. Excluding defined benefit plans, an employer matching credit would be provided equally to the applicable percentage (100% in the first and second years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year) of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000. The total additional credit would be limited to employers with 50 or fewer employees and phased out for employers with between 51 and 100 employees.

Retirement Plan Distribution changes:

  1. Required minimum distributions (RMD) were designed to ensure individuals do not have large IRA balances remaining at the end of their lives to pass on to younger generations. RMDs force the account holder to begin taking distributions triggered by a certain age. The SECURE Act increased the age requirement to 72. However, the proposed legislation would increase the required minimum distribution age to 75 over several years. 
  2. The Act would reduce the permanent penalty for failing to take required minimum distributions from 50% to 25%. If the failure to take RMDs is corrected promptly, the penalty reduces from 25% to 10%.
  3. And lastly, Retirement plans and IRAs (excluding pension plans) with less than $100,000 at the end of the year before attaining the age of 75 will not be required to take RMDs.

Sources:
https://www.congress.gov/bill/117th-congress/senate-bill/4353/text
https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/2.0Sectionbysection_final.pdf

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