Senators Cardin and Portman Offer Another Broad Retirement Reform Bill

Among some 50 other provisions aimed at improving retirement readiness in the U.S., the bill substantially increases the tax credit under current law for small businesses that adopt a new qualified retirement plan.

U.S. Senators Ben Cardin, D-Maryland, and Rob Portman, R-Ohio, this week introduced the Retirement Security and Savings Act, which they describe as “a broad set of reforms designed to help Americans save more for retirement and increase access to 401(k)s and other retirement plans.”

The legislation joins an increasingly crowded field of bipartisan proposals that supporters want to see passed during the lame duck session of Congress, though the window for action in this session is quickly running out. 

The lawmakers say their bill includes more than 50 provisions to increase savings in defined contribution (DC) plans and IRAs, help improve coverage in the small employer market and among part-time workers, reduce barriers to lifetime income retirement options, and allow employees to keep retirement savings in an individual retirement account (IRA) or qualified plan “until they need them for retirement expenses instead of being forced to deplete their savings after age 70 and a half.”

The text of the legislation runs more than 110 pages. According to Senators Cardin and Portman, their bill is supported by the American Benefits Council, AARP, Fidelity, Nationwide, Empower Retirement, TIAA, the Committee for Annuity Insurers, Transamerica, LPL Financial, Edward Jones, State Street Corporation, Church Alliance, the U.S. Chamber of Commerce, the Insured Retirement Institute, and the National Association of Government Defined Contribution Plan Administrators (NAGDCA).

Highlights of the proposal

The bill establishes a new automatic enrollment safe harbor for employers to meet nondiscrimination requirements. Under current law, the Senators say, the automatic deferral may be just 3% of salary for the employee’s first year. The provision would set the minimum default level of contributions at 6% in the first year, and escalate it to 10% within five years. Further, the measure makes the Saver’s Credit refundable and requires that the credit be contributed directly to a Roth account in a retirement plan or to a Roth IRA. The bill also allows taxpayers to claim the saver’s credit on their 1040-EZ, and expands the group eligible for a 20% credit instead of a 10% credit.

Echoing other legislation recently introduced by Senator Cardin, the bill allows employers to make matching contributions to retirement accounts of employees paying off qualified student loan debts.

To address the coverage issue for part-time workers, the bill expands retirement plans to include employees working between 500 and 1,000 hours per year. Under current law, employers generally may exclude part-time employees who work fewer than 1,000 hours per year when providing a defined contribution plan to their employees.

Among other provisions aimed at supporting small businesses, the bill substantially increases the tax credit under current law for small businesses that adopt a new qualified retirement plan. Under current law, the credit cannot exceed $500; under the provision, small businesses could claim a credit as large as $5,000.  Additionally, the measure allows small businesses to self-correct “all inadvertent plan violations under the IRS’ Employee Plans Compliance Resolution System (EPCRS) without a submission to the IRS, unless otherwise specified in regulations.”

The bill more easily facilitates the sale of Qualifying Longevity Annuity Contracts (QLACs), a type of deferred annuity that begin payment at the end of an individual’s life expectancy. The Senators say this is “a very inexpensive way for retirees to hedge the risk of outliving their savings.”

Among other provisions reforming required minimum distribution rules, the bill provides a blanket exception for individuals with $100,000 or less in aggregate retirement savings. The measure increases the age at which individuals are required to begin drawing down their retirement from an IRA or qualified plan. Under current law, the beginning age is 70 and a half; the bill increases the age to 72 in 2023 and 75 in 2030.

Finally, the bill reduces the excise tax for failing to take required minimum distributions, lowering it from 50% of the shortfall owed to at most 25%, and to 10% or zero in other cases.

The legislation builds on Portman and Cardin’s previous success in enacting reforms to enhance the retirement system as members of the House of Representatives in 1996, 2001, and 2006. Of note, the 2001 Portman-Cardin measure more than doubled contribution limits to IRAs, allowed portability between different types of qualified retirement plans, and created the ability for older workers to make catch-up contributions to 401(k)s and IRAs.