The $1.7 trillion spending bill signed into law by President Biden includes key provisions that are meant to make it easier for workers to save for retirement.
The bill could reshape 401(k) plans for millions of Americans, with changes to retirement contribution and withdrawal rules.
This comes as more Americans are working later in life, often unable to get by on Social Security and retirement savings. By 2030, the number of people age 75 years and older who will be working or looking for work is expected to grow by 96.5%, according to the Bureau of Labor Statistics.
"The big ugly fact out there is that since modern recorded history, only about half of workers have ever had a retirement plan," says Monique Morrissey, an economist with the Economic Policy Institute, referring to savings vehicles like 401(k)s. "More than half of workers either have little or nothing."
Many Americans lack access to a private retirement savings plan
The median balance in a 401(k) for Americans age 65 and up is $87,700, according to data compiled by investment company Vanguard.
The new legislation, known as Secure 2.0, would mostly benefit workers who already have access to workplace retirement plans, but there are features that would help certain employees who cannot obtain 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.
Here are some ways the proposed retirement provisions intend to help workers:
Currently, 51% of Americans can't pay more than than three months' of expenses through an emergency fund, and 25% say they have no emergency fund at all, according to consumer financial services company Bankrate.
Under the new policy change, unless employees opt out, employers would be allowed to automatically enroll workers in an emergency savings account alongside their retirement plan, up to $2,500. Workers would contribute to the account with money that has already been taxed; withdrawals would be tax free.
Employers could also provide workers with a one-time annual withdrawal of $1,000 from their retirement accounts for certain emergency expenses, and the employee wouldn't have to pay the normal 10% penalty.
Part-time workers would no longer be required to work three consecutive years to be eligible for for their company's 401(k) plans, a policy introduced under the 2019 Secure Act. Instead, part-time workers would need to work between 500 and 999 hours for two consecutive years to be eligible for their company's 401(k) plans.
Student loan borrowers
Workers with large student loans often opt to pay down their debts instead of contributing to retirement savings. A survey of nearly 500 workers found that 79% said their student debts cut into their ability to save adequately for retirement, according to a 2016 Fidelity Investment study.
Under the new law, starting in 2024, student loan payments would count as retirement contributions and would qualify for an employer's matching contribution.
More tax credits available
Currently, only low- and middle-income earners who owe at least $1,000 in taxes can get back half of their retirement savings contribution — a maximum of $1,000 — as a nonrefundable tax credit.
Under the new provisions, workers who make up to $71,000 a year will get a matching contribution from the government when they save through a workplace retirement plan. That contribution would be deposited into the retirement accounts and could not be withdrawn without penalty.
The bill would require employers to automatically enroll employees in 401(k) and 403(b) plans starting in 2025. Automatic employee contributions would increase by 1% each year until they reached at least 10%, but not more than 15%.
Small businesses with fewer than 10 employees, churches and governmental plans would be exempt.
Catch-up contributions and required minimum distributions
This provision is aimed to give high-income earners an additional boost as they approach retirement age.
Right now, those who are 50 and older can direct an extra $7,500 annually toward their 401(k)s. Starting in 2025, that limit would increase to $10,000.
The bill would also raise the age at which Americans are required to withdraw from tax-deferred retirement accounts from 72 to 73 on Jan. 1 and eventually to 75 in 2033.