S. 5156: Retirement Simplification and Clarity Act

This bill would change federal retirement tax rules to make it easier for some workers age 50 or older to move money from an employer retirement plan into a retirement annuity before fully retiring. In general, it would let a plan allow a “direct rollover” of all or part of the employee-contributed portion of a 401(k)-type account into an individual retirement annuity.

What the bill allows

Under current rules, retirement money can often be rolled over when someone changes jobs or retires, but this bill would create a special rule allowing some in-service rollovers before retirement for people age 50 or older. This would apply only if the employer’s plan chooses to allow it. The money being rolled over would have to come from the portion of the account tied to employer contributions made based on the employee’s own election.

What information plans would have to provide

The bill also adds a “safe harbor” for the warning notice people receive about distributions and rollovers. If the notice includes a set list of plain-language points, it would count as meeting the legal disclosure requirement. Those points include:

• the person has 30 days to review the notice before acting,
• direct payments to the person may be taxable and subject to withholding,
• withdrawals before age 59½ may trigger an additional 10% tax,
• some distributions cannot be rolled over, such as required minimum distributions and hardship withdrawals,
• the person can defer tax by rolling eligible amounts into another qualified plan or IRA,
• the plan administrator can help determine what is eligible for rollover,
• small balances under $7,000 could be automatically paid out or rolled over in certain cases,
• amounts can be rolled over when changing employers, or left in the old plan,
• eligible amounts can be rolled into an IRA, individual retirement annuity, or Roth IRA in some cases,
• direct rollovers are not subject to the mandatory 20% withholding rule,
• if a person receives the money directly, they generally have 60 days to roll over the eligible amount plus the withheld amount, and
• additional information is available from the IRS.

Agency authority and timing

The Treasury Department would be allowed to issue regulations and guidance to carry out the new rules and update the notice language if needed. The changes would apply to taxable years beginning after December 31, 2026.

Relevant Companies

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