The “SECURE Act 2.0” continues to evolve as it is being reviewed in the Senate. Here’s what you need to know.
The bill known as “SECURE Act 2.0” is now taking shape in the Senate after passing in the House of Representatives in March. It is the follow-up to 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act, which you can read about here and here.
Below are some of the basic provisions of the proposed legislation which may affect your clients’ retirement plans.
Remember, these provisions are still under review and may be altered in the Senate. As of this writing, the Senate’s Health, Education, Labor & Pensions Committee has introduced their version of SECURE Act 2.0 for debate, calling it the “Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg” aka the “Rise & Shine Act.”
With broad bipartisan support, some final form of SECURE Act 2.0 is expected to pass in 2022.
- Raising the Age for RMDs
The original SECURE Act raised the age for required minimum distributions (RMDs) from 70-1/2 to 72. This new bill is expected to raise the age to 75. Being debated is whether the age increase will take effect immediately in a designated future year, or be raised gradually over the next 10 years.
- Reducing the RMD Tax Penalty
Currently, the tax penalty for failing to handle RMDs correctly—like withdrawing the incorrect amount, withdrawing from the wrong accounts, or failing to withdraw by midnight on December 31st in the year due—is a whopping 50% on top of the tax due. SECURE Act 2.0 may lower that penalty to 25%.
- Allowing Employers to Offer a Matching Amount for Student Loan Payments
Although the IRS has already issued a ruling allowing an employer to match employees’ payments to student loan debt as an alternative to matching their 401(k) contributions, the statutory law has never been formalized.
SECURE Act 2.0 may do just that.
- Upping Catch-Up Contributions for Older Workers
Right now, the annual limit for contributions to a 401(k) plan for 2022 is $20,500, plus an additional “catch-up” contribution amount of $6,500 (indexed for inflation) for people age 50 or older.
The SECURE Act 2.0 may up the ante for those ages 60+.
The House version of the bill would allow an annual catch-up amount of $10,000 indexed for inflation (up from $6,500) for people age 62, 63 and 64, beginning in 2024.
The Senate’s version of the bill would also allow an annual catch-up amount of $10,000 indexed to inflation, except that it would become effective starting December 31, 2021—so the 2022 tax year would be included—and catch-ups would not end at age 65.
- Roth-ifying Catch-Ups
For both the House and Senate versions of the bill so far, all catch-up contributions starting in 2023 will be required to be placed in Roth accounts—meaning the contributions will be taxable in the year they are made.
This may affect your clients’ current tax bills if they have formerly been making catch-up contributions to pre-tax accounts.
- Roth-ifying Company Matching Amounts
Currently, any employer retirement plan matching contribution amount is made on a pre-tax basis even if an employee has elected to contribute to an after-tax Roth 401(k).
Depending on the final version of SECURE Act 2.0., employer plan sponsors may have the option of permitting employees to elect that some or all of their matching contributions be treated as Roth contributions for 401(k) plans.
Employer matching contributions designated as Roth contributions would not be excludable from employees’ gross income—in other words, the employer matching amount would be subject to income tax in the tax year it is received.
- Staying In a Workplace Plan After Leaving a Job
Employer-sponsored plans like 401(k)s currently can transfer balances out of their group plan into an IRA (Individual Retirement Account) if a former employee has a low balance—usually from $1,000-$5,000—in the group plan. SECURE Act 2.0 may increase the limit from $5,000-$7,000 before an employer can transfer a former employee’s money out.
- Auto-Enrollment in Retirement Plans
Though the Senate may only offer employers incentives for this provision rather than mandate it, the House version of SECURE Act 2.0 includes automatic enrollment into a new job’s 401(k) or 403(b) plan at a rate of 3% of the employee’s pay, gradually increasing by 1% per year until they reach 10% of their pay being contributed.
An employee could still opt out of doing this, and companies with 10 employees or fewer, those which have been in business less than three years, churches, and governments are exempted from the requirement.
NOTE: The reasoning behind the provision for auto-enrollment is that it would increase participation and assist retirement. That logic is well-founded. The Thrift Savings Plan (TSP), which is essentially the equivalent to a 401(k) plan for federal employees, automatically enrolls government workers and has a participation rate of 93.5%. By contrast, in 2021 private employer-sponsored plans had a participation rate of only 75% for eligible workers.
- Among other key changes, SECURE Act 2.0 may also:
- Allow part-time workers to qualify for workplace retirement plans earlier.
- Eliminate some of the barriers to offering lifetime income annuities to retirement plan investment options.
- Extend some of the design features of 401(k) plans to 403(b) retirement plans.
- Create a national database for Americans to find lost retirement accounts.
- Expand self-correction opportunities for participant loan errors and elective deferral failures.
- Require the Treasury Secretary to take steps to increase public awareness of the “Saver’s” tax credit available to low- and moderate-income workers.
With strong support from both political parties, SECURE Act 2.0 is expected to pass this year. It may continue to evolve as it slowly works its way through the Senate, but with trouble brewing regarding the solvency of Social Security, legislation geared toward boosting retirement is seen as a positive by many.
This article is for informational purposes only, and is based on content research from the above sources. We will continue to update as we learn more.
Further reading about the original SECURE Act: https://thequantum.com/5-things-you-need-to-know-about-the-secure-act/ – https://thequantum.com/more-things-consumers-need-to-know-about-the-secure-act-part-2/