SECURE Act 2.0: Getting Closer to Reality
SECURE Act 2.0 would expand retirement plan coverage and make it easier for employers to offer retirement plan benefits.
The Securing a Strong Retirement Act, or ‘SECURE Act 2.0’ as it is commonly called, came much closer to being realized with the House passing the bill by a wide margin, 414-5, on March 29, 2022. This comes almost a full year after the House Ways and Means Committee unanimously approved the bill. The bill has been sent to the Senate, who approved their own version on June 22, 2022, as the EARN Act. Once the bipartisan bill has been finalized, it will be sent to the President for signature.
SECURE 2.0 builds on the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which expanded retirement coverage to more Americans. In addition, the new bill includes several provisions designed to ease retirement plan administration which should encourage more employers to adopt 401(k) plans.
Please keep in mind that nothing has been finalized as of September 15, 2022.
Key provisions of SECURE Act 2.0 related to 401(k) plans include:
- Expansion of automatic enrollment. Requires new 401(k) plans to automatically enroll employees at a default rate between 3% and 10% and automatically escalate contributions at 1% per year to at least 10% (but no more than 15%). Of course, employees can always change their contribution rate or opt out of the plan at any time. Existing plans are grandfathered, and new businesses as well as those with 10 or fewer employees are exempt.
- Enhanced tax credits for small employer plans. The SECURE Act provides businesses with fewer than 100 employees a three-year tax credit for up to 50% of plan start-up costs. The new bill increases the credit to up to 100% of the costs for employers with up to 50 employees. In addition, SECURE Act 2.0 offers a new tax credit to employers with 50 or fewer employees, encouraging direct contributions to employees. This new tax credit would be as much as $1,000 per participating employee.
- Increased age for required minimum distributions (RMDs) to 75. The SECURE Act increased the RMD age to 72 (from 70.5). The new bill increases the RMD age even further: to 73 in 2023; 74 in 2030 and ultimately 75 in 2033.
- Higher catch-up limits. Catch-up contributions mean older Americans can make increased contributions to their retirement accounts. Under current law, participants who are 50 or older can contribute an additional $6,500 to their 401(k) plans in 2022. The new bill increases these limits to $10,000 for 401(k) participants at ages 62, 63, and 64.
- Catch-up contributions must be made in Roth. Currently, participants can choose whether to contribute pre-tax or Roth as their catch-up contributions. The new bill requires that all catch-up contributions be made in Roth moving forward. This will provide less tax diversification for participants but will generate more tax revenue to help offset the cost of some of the other provisions in the bill.
- Ability to match on student loans. Heavy student debt burdens prevent many employees from saving for retirement, often preventing them from earning valuable matching contributions. Under this provision of the bill, student loan repayments could count as elective deferrals, and qualify for 401(k) matching contributions from their employer. The bill would also permit a plan to test these employees separately for compliance purposes.
- Ability to contribute matching contributions in Roth dollars. Currently, all employer matching contributions must be made on a pre-tax basis. The bill proposes that employers would be allowed to offer matching contributions to participants on a Roth basis. Roth matching contributions would not be deductible for employers as pre-tax contributions are, but may provide beneficial tax benefits to employees.
- Additional incentives for employees to contribute. The only way an employer can currently incentivize employees to contribute to their 401(k) plan is through an employer match. The bill proposes that employers could now offer additional incentives, such as a small gift card benefit, to employees who contribute to their 401(k).
- One-year reduction in period of service requirements for long-term part time workers. The 2019 SECURE Act requires employers to allow long-term part-time workers to participate in the 401(k) plan if they work 500-999 hours consecutively for 3 years. The new bill reduces the requirement to 2 years. Keep in mind that plans with the normal 1000 hours in 12 months eligibility requirement for part-time employees must allow participants who meet that requirement to enter the plan.
- Retroactive first year elective deferrals for sole proprietors. Thanks to the SECURE Act, employers can retroactively establish a profit sharing plan for the previous year up until their business tax deadline. This allows the owner to receive profit sharing for the previous year without having to make any employee deferrals. SECURE Act 2.0 extends the retroactive rule to sole proprietors or single member LLCs, where only one owner is employed. For example, a sole proprietor owner would have until April 15, 2023 to allocate profit sharing and elective deferrals for the 2022 plan year.
- Penalty-free withdrawals in case of domestic abuse. The new bill allows domestic abuse survivors to withdraw the lesser of $10,000 or 50% of their 401(k) account, without being subject to the 10% early withdrawal penalty. In addition, they would have the ability to pay the money back over 3 years.
- Expansion of Employee Plans Compliance Resolution System (EPCRs). To ease the burdens associated with retirement plan administration, this new legislation would expand the current corrections system to allow for more self-corrected errors and exemptions from plan disqualification.
- Separate application of top heavy rules covering excludable employees. SECURE 2.0 should make annual nondiscrimination testing a bit easier by allowing plans to separate out certain groups of employees from top heavy testing. Separating out groups of employees is already allowed on ADP, ACP and coverage testing.
- Eliminating unnecessary plan requirements related to unenrolled participants. Currently, plans are required to send numerous notices to all eligible plan participants. The new legislation eliminates certain notice requirements.
- Retirement savings lost and found - SECURE Act 2.0 would create a national, online lost and found database. So-called “missing participants'' are often either unresponsive or unaware of 401(k) plan funds that are rightfully theirs.