While some Republicans in Congress are threatening to block a $2 trillion federal stimulus package—the largest bailout in United States history—over concerns about its proposed increase to unemployment insurance, it looks like the bill’s two key 401(k)-related provisions are a safe bet to make the final draft.
The proposed bill, expected to be voted on by the Senate late Wednesday, includes a temporary waiver of required minimum distribution (RMD) rules for 401k plans and IRAs for calendar year 2020, and also would waive the 10% penalty for early withdrawals up to $100,000 from 401k plans. It would also allow people up to three years to repay the distributions and increases the amount people can contribute to make up for the distributions.
Here are the two 401k-related provisions of the bill, taken directly from a six-page summary released by the Senate Finance Committee of the (currently) 619-page draft of the bill.
Section 2203. Temporary waiver of required minimum distribution rules for certain retirement plans and accounts
The provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.
Section 2202. Special rules for use of retirement funds
Consistent with previous disaster-related relief, the provision waives the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020.
In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. Further, the provision provides flexibility for loans from certain retirement plans for coronavirus-related relief.
A coronavirus-related distribution is a one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
The summary also includes an exclusion for certain employer payments of student loans:
Section 2206. Exclusion for certain employer payments of student loans
The provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income.
The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.
Final hurdles to passage
As for the Republican concerns over unemployment insurance provisions, Sens. Tim Scott (R-S.C.), Lindsey Graham (R-S.C.), and Ben Sasse (R-Neb.), said in a statement Wednesday that the bill could provide a “strong incentive for employees to be laid off instead of going to work,” because some people could theoretically make more by being unemployed.
“This isn’t an abstract, philosophical point—it’s an immediate, real-world problem. If the federal government accidentally incentivizes layoffs, we risk life-threatening shortages in sectors where doctors, nurses, and pharmacists are trying to care for the sick, and where growers and grocers, truckers and cooks are trying to get food to families’ tables,” the statement said. “We must sadly oppose the fast-tracking of this bill until this text is addressed, or the Department of Labor issues regulatory guidance that no American would earn more by not working than by working.”
According to Politico, the Senators are working with the Senate Finance Committee to craft an amendment to fix the “drafting error” before they agree to fast-track consideration of the package—a demand that has delayed the bill’s release, as well as the timeline for final passage.
Politico adds Sen. Bernie Sanders (I-Vt.) also threatened to throw up hurdles, warning that he would put out his own demands on oversight of a business fund if the GOP senators refused to drop their unemployment insurance changes.
Once the Senate finalized and passed the bill by a unanimous 96-0 vote late Wednesday evening, the House of Representatives, currently on recess, is expected to pass it via “unanimous consent” Friday that would eliminate the need to force representatives to quickly return to Washington for a roll call vote.
Treasury Secretary Steve Mnuchin, who negotiated the bill over five days of tense negotiations with Senate Majority Leader Mitch McConnell, Senate Minority Leader Chuck Schumer, has said President Trump would “absolutely” sign the bill once it makes it through Congress.
Editor’s Note: This story has been updated to reflect a more accurate timeline for the bill’s passage. 401k Specialist will continue to provide timely updates on the bill and detailed analysis of the implications of its 401k-related provisions.