SECURE 2.0: What individual investors and businesses need to know

The Securing a Strong Retirement Act of 2022 (SECURE 2.0 or H.R. 2954), introduced by Ways and Means Committee Chairman Richard Neal (D-MA) and Kevin Brady (R-TX), passed the House on March 29, 2022. Both parties supported the bill, and it passed with a decisive 414-5 vote.

This bill’s overall goal is to “increase retirement savings, simplify and clarify retirement plans” and “other purposes.” It now goes to the Senate, where it is expected to go through a markup based on the Senate’s own version of a similar bill — the Retirement Security and Savings Act of 2021.

The Senate will likely act on the bill yet this spring. We are anticipating several changes in the Senate, but it is widely anticipated we will see this become law in some form because of the bipartisan support this legislation has received.

Highlighted below are key provisions of SECURE 2.0:

Expanded automatic enrollment in retirement plans. Automatic enrollment would be mandated in 401(k) and 403(b) plans at the time of participant eligibility for plan years after Dec. 31, 2023. Opt-out would be permitted. The automatic rate must be at least 3% and not more than 10%. A Qualified Default Investment Alternative (QDIA) would be used as the default investment option for participants that make no investment election.

Increased age for required minimum distributions (RMDs) required beginning date. For participants who reach age 72, the RMD required beginning age is raised as follows: in the case of a participant who reaches age 72 after Dec. 31, 2022 and age 73 before Jan. 1, 2030, the age increases to 73; in the case of a participant who reaches age 73 after Dec. 31, 2029 and age 74 before Jan. 1, 2033, the age increases to age 74; and in the case of a participant who reaches age 74 after Dec. 31, 2032, the age increase to 75.

Higher catch-up limit for participants ages 62, 63, and 64. For taxable years beginning after 2023, the catch-up contribution amount for certain retirement plans would increase to $10,000 (currently $6,500 for most plans) for eligible participants who have reached ages 62-64 by the end of the applicable tax year.

Treatment of student loan payments as elective deferrals for purposes of matching contributions. For plan years beginning after Dec. 31, 2022, employers may amend their plans to make matching contributions to employees based on the employee’s qualified student loan payments. Qualified student loan payments are defined as amounts in repayment of qualified education loans as defined in Section 221(d)(1) of the IRC. This could prove significant in assisting with hiring and retaining employees.

Small immediate financial incentives for contributing to a plan. Under current law, employers are generally prohibited from providing any immediate incentives, other than matching contributions, for employees to contribute to a 401(k) or 403(b) plan. SECURE 2.0 would allow employers to offer de minimis financial incentives, such as gift cards in small amounts, to encourage employees to contribute.

Safe harbor for corrections of employee deferrals. Penalties will be waived on any errors in implementing automatic enrollment and escalation features if, among other requirements, errors are corrected within 9 ½ months after the last day of the plan year in which the errors occurred. This provision would be effective as of enactment date.

One-year reduction in period of service requirements for long-term part-time workers. The current requirement to permit certain employee to participate who work at least 500 hours of service following three consecutive years of service will be reduced to two consecutive years.

Recovery of retirement plan overpayments. The bill includes several provisions aimed at reducing the claw-back of overpayments from retirement plans to retirees to help ensure that the fixed income of retirees is not diminished. Plan fiduciaries would have more latitude to decide whether to recoup inadvertent overpayments made to retirees from qualified plans. Overpayments that are at least three years old and made due to plan fiduciary error would be prohibited from being recouped. Interest could not be sought on the overpayment and beneficiaries could challenge the classification of amounts as “overpayments” under the plan’s claim procedures.

Reduction in excise tax on certain accumulations. The penalty for failure to take RMDs from a qualified plan would be reduced from 50% to 25% for tax years beginning after Dec. 31, 2022.

Special one-time IRA distribution. Provision will allow individuals age 70 ½ and older to make a one-time charitable distribution, up to $50,000, from an IRA to a split-interest trust, such as a charitable remainder trust. Also, the annual IRA charitable distribution limit of $100,000 will be indexed.

Annuities as Qualified Default Investment Alternatives (QDIAs). Plan sponsors will be permitted to offer annuities as participant’s default investment for the first time and remove the required minimum distribution requirement for life annuities.

Expansion of startup credits for small employer plans. Provision increases the new plan startup credit for small employers to cover 100% of the cost to small employers to implement a plan for the first three years. There will also be an additional credit to encourage small employers to make direct contributions to their 401(k) plans that can offset up to $1,000 of employer contributions for each participating employee.

Provisions for pooled employer plans (PEPs) and open multiple employer plans (MEPs). PEPs and MEPs will be broadened to allow unrelated public education and other non-profit employers to join a single 403(b) plan.

Enhancement of saver’s credit. SECURE 2.0 would set the applicable percentage of the saver’s credit at 50%, rather than having the percentage decline as income increases. The Act would also make the credit available to taxpayers with higher levels of adjusted gross income than under current law — via changes to the adjusted-gross-income-based phaseout of the credit. This section would apply to tax years beginning after Dec. 31, 2026.

Indexing of IRA catch-up limit. The $1,000 catch-up limit will now be indexed, beginning in 2024 taxable year.

Dollar limit on mandatory distributions. Employers may now transfer former employees’ balances into an IRA if their balances are between $1000 - $5000 and they don’t respond to a distribution election. After Dec. 31, 2022, the $5000 limit is raised to $7,000.

Modification to top-heavy testing. Provision allows for now being able to perform top-heavy testing on the excludable and non-excludable employees. This will ease the burden of a potential failed top-heavy test on small employees and the ensuring cost of that failure.

Reform of family attribution rules. Inequities where spouses with separate businesses who reside in a community property state are now put on the same playing field as those who reside in separate property states. Also, the attribution rules that apply to attribution of stock between parents and minor children is modified.

Catch-up contributions. Elective deferral catch-up contributions will now only be permitted as Roth contributions, effective for plan years beginning after Dec. 31, 2022.

Solo 401(k) plans. Employee deferral contributions will now be permitted for new solo 401(k) plans for their first year up to the due date of the tax return of the tax year in which the plan was established. Previously, the plan had to be established by Oct. 1 of the tax year in order to permit elective deferrals.

Roth treatment for employer contributions. Employees will be permitted to elect to have employer contributions in SEPs and matching contributions in 401(k), 403(b), and governmental 457(b) plans treated on a Roth basis.

Other items to note:

The bill includes a rollback of the Department of Labor’s e-delivery regulation permitting electronic disclosures, requiring at least one notice a year in paper form. The bill did not include an elimination of the backdoor Roth conversions or the mega-Roths, but there is a possibility that Congress will act on a separate bill as part of the budget reconciliation process, and those changes are being eyed as revenue raisers to help offset the cost of the bill. Depending upon when the Senate acts and a final bill is eventually passed, we will see shifts in the effective dates. Senate members want to also include provisions that address areas like new emergency savings options, auto re-enrollment, and helping people find lost retirement accounts.

On a separate note:

The House Education and Labor Committee on April 5 sent the Protecting America’s Retirement Security Act to the House floor for a vote. This bill is not enjoying the bipartisan support that SECURE 2.0 has. It contains provisions in the following key areas:

  • Defined contribution plan fee disclosure improvements for participants
  • Creation of personal financial education government portal
  • Expanded spousal consent requirements around benefit distributions
  • Automatic enrollment required every three years for any participant who opted out

For a personal, confidential conversation about how these potential changes could impact you and your business, contact us to connect with an advisor today.

Published in Retirement

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