As House considers Universal Savings Accounts, Prudential isn’t waiting

A two-page memo laying out the framework for “Tax Reform 2.0” confirms reports that Republicans in the House of Representatives intend to legislate Universal Savings Accounts into existence.

The memo packages USAs with three other legislative objectives intended to promote “family savings,” which include expanding retirement plan sponsorship among small businesses, expanding qualified expenditures for 529 savings accounts, and allowing families to tap qualified retirement accounts penalty-free to cover the expenses of newborn babies or adopted children.

But the primary objective of Tax Reform 2.0 will be making permanent the cuts to individual tax rates in last year’s Tax Reform and Jobs Act, which are scheduled to sunset at the end of 2025.

The memo, which was released by Rep. Kevin Brady, R-TX, chair of the House Ways and Means Committee, does not confirm whether legislation to extend the tax cuts will be separate from retirement and savings reforms. Any bill—or bills—that emerge from the House will need a 60-vote majority to pass the Senate.

Nor does Brady’s memo define the specifics of USAs, which have been floated by Republicans and some conservative think tanks for years. Rep. Dave Brat, R-VA, and Sen. Jeff Flake, R-AZ, introduced the Universal Savings Account Act, most recently in 2017. That bill would allow up to $5,500 in after-tax savings to investment accounts that grow tax-free and could be accessed at any time at the full discretion of account holders.

Bipartisan bills in Senate also address inadequate savings rates

Two other bipartisan bills in the Senate have been introduced. They aim to address the inability of tens of millions of working Americans to cover minimal emergency expenses:

• The Rainy Day Savings Act would allow up to 20 percent of tax filers’ refunds to be deposited in the Rainy Day Savings Program, which would accumulate interest in an account held with the Treasury Department for six months before being directly deposited in tax-payers’ personal bank accounts.
• The Strengthening Financial Security Through Short-Term Savings Act would allow employers to automatically deduct employee contributions to short-term savings accounts, which would have a maximum account balance of $10,000.  Sponsored by Sen. Heidi Heitkamp, D, ND, the bill instructs the Treasury Department to issue regulations or guidance for offering the accounts within defined contributions plans.

Pru not waiting for Congress

The two new bills in the Senate targeting general savings were introduced with two other bills that would incentivize employers’ adoption of automatic features in existing defined contribution plans and expand access to multiple employer plans for small businesses that do not offer retirement plans.

Along with the substantially broader Retirement Enhancement Security Act, sponsored by Sen. Orin Hatch, the savings and retirement initiatives in the Senate enjoy bipartisan support.

But even if their passage were expedited, administrative agencies would still need time to issue the relative regulations and guidance to implement legislation.

One service provider to defined contribution plans isn’t waiting for that.

This week, Prudential Retirement, which administers $427.6 billion in retirement plan assets, introduced a new plan design feature to address participants’ emergency savings needs.

Under the feature, sponsors can implement a savings structure allowing after-tax participant contributions to a supplementary savings account within their existing retirement plan. Contributions would accrue to give participants a savings cushion they could tap in the event of an emergency.

“Making it easier for employees to build savings that can also be used in an emergency is the natural next step in the evolution of retirement plan design,” said Phil Waldeck, president of Prudential Retirement, in a statement.

“A small additional contribution each pay period may help build a financial cushion and reduce the effects of 401(k) plan withdrawals and loans that may cut into employees’ retirement savings and increase workforce costs for employers. For employees that never need to use it, the money eventually adds to their long-term retirement savings,” added Waldeck.

In the event of an emergency, a participant would withdraw from the after-tax savings account, which theoretically would be funded by contributions beyond what participants are already deferring to their 401(k) accounts.

Withdrawals from the savings account would still be subject to a 10 percent early withdrawal penalty.

But that would be a less painful penalty than taking an early distribution from the pre-tax portion 401(k)s.  If the contributions allocated for emergency spending are not used, they are rolled into the general retirement savings account.

A Prudential spokesperson explained that the new feature is different from a Roth 401(k) structure, which impose additional penalties if withdrawals are taken within the first five years of an establishing an account.

Beyond providing incentives toward a savings mindset, the new feature is designed to address common negative behaviors among plan participants, such as procrastination and impulse spending, the spokesperson said.