President Biden will sign the $1.7 trillion spending bill this week. It includes key provisions to help workers save for retirement.
As Americans age, more Americans work later in life and are often unable or unwilling to pay for Social Security or retirement savings. According to the Bureau of Labor Statistics, the number of older people who are working or looking for work will increase by 96.5% by 2030.
Monique Morrissey from the Economic Policy Institute says, “The big ugly truth out there is that only about half of employees have ever had a pension plan.” She refers to savings vehicles such as 401(ks)s.
Many Americans don’t have access to a private retirement savings program.
According to data from investment company Vanguard, the median balance in a retirement plan (401(k),) for Americans 65 years and older is $87,700
The new legislation, Secure 2.0 would primarily benefit workers who have access to workplace retirement programs , but there are some features that could help employees who don’t have them at work.
Currently, a third of Americans do not have access to any private retirement savings plan, like a 401(k), according to PricewaterhouseCoopers.
These are just a few of the ways that retirement provisions proposed will help workers.
Save for an emergency
Currently, 51% of Americans can’t pay more than than three months’ of expenses through an emergency fund, and 25% say they have
Employers would have the right to enroll employees in an emergency savings account along with their retirement plan, provided they do not opt out. The account would allow workers to contribute money that is already taxed, and the withdrawals would not be subject to tax.
Employers could offer workers $1,000 in one-time annual withdrawals from their retirement accounts to cover certain emergency expenses. The employee would not have to pay the 10% penalty.
Part-time workers
The 2019 Secure Act introduced a new policy that part-time workers won’t have to work for three years consecutively to be eligible for company’s 401k plans. Part-time workers will need to work between 500 to 999 hours in two consecutive years to be eligible to the company’s 401 (k) plans.
Borrowers of student loans
Many workers with large student loans opt to pay off their debts rather than contributing to retirement savings. According to a 2016 Fidelity Investment survey, 79% of workers said that their student loans had impacted their ability to save enough for retirement.
The new law would allow student loan payments to count as retirement contributions starting in 2024 and be eligible for employer matching contributions.
Additional tax credits are available
Only low- and middle-income earners with a tax liability of at least $1,000 can receive half of their retirement savings as a nonrefundable credit.
The new provisions provide that workers earning up to $71,000 per year will receive a matching contribution from government when they save through their workplace retirement plan. The contribution would be deposited in retirement accounts and cannot be withdrawn without penalty.
Automatic enrollment
Employers would be required to enroll their employees in 401(k), 403(b), and other plans by the bill starting in 2025. The automatic employee contributions would rise by 1% per year until they reach at least 10% but not greater than 15%.
Exempt from this would be small businesses that employ fewer than 10 people, churches, and government plans.
Required minimum distributions and catch-up contributions
This provision is intended to provide an extra boost for high-income earners as they reach retirement age.
For now, people 50 years and older can contribute an additional $7,500 per year to their 401(k). This limit will increase to $10,000 in 2025.
The bill would also increase the age at which Americans can withdraw from tax-deferred retirement plans from 72 to 73 on January 1st, and eventually to 75 by 2033.
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