1-Apr-22
SECURE Act 2.0 (Maybe)
Take-Away: On March 25, 2022, the House passed HR 2954, the so-called SECURE Act 2.0. This bill proposes many additional changes to existing rules that are intended to encourage retirement savings. The bill also purports to simplify and clarify retirement plan requirements (ha!) A summary of some of the changes in HR 2954 follow.
Required Beginning Date Increase:
Currently the required beginning date (RBD) when required minimum distributions (RMDs) must be taken from a retirement account is age 72. The change would be to start a gradual increase in the RBD, starting in 2023. The RBD would increase to age 73 for individuals who attain age 72 after December 31, 2022. Sporadic increases in the RBD would follow over the next several years ending with a RBD at age 75 for those individuals who attain age 74 after December 31, 2032. This change to IRC 401(a)(9)(C) would become effective starting in 2023.
Increased Catch-up Contributions:
IRAs: Currently, annual catch-up deductible contributions to an IRA are permitted by IRA owners who are age 50 and older. The current maximum catch-up contribution amount to an IRA is $1,000. The change would index this annual catch-up amount for inflation. This change that amends IRC 219 would become effective starting in 2024.
Qualified Plans: Currently, the annual limit on catch-up contributions to a qualified plan account, e.g. a 401(k) plan, is $6,500 (except for SIMPLE plans for which the annual limit is $3,000.) This amount would be increased to $10,000 ($5,000 for a SIMPLE plan account owner) both indexed for inflation, but only if the individual participant has attained ages 62, 63, and 64, but not age 65. This change would become effective starting in 2024.
Part-time Employees:
The SECURE Act required plan sponsors to allow long-term, part-time, employees to participate in 401(k) plans. The Act required participation either with service of 1,000 hours, or three consecutive years of service where the employee provided at least 500 hours of service. The change would reduce the 3-year requirement down to 2 years. The change would continue to disregard pre-2021 years of service for vesting purposes. This change would become effective in 2023.
Clarifications:
Lost and Found Accounts: Plan sponsors would have heightened responsibilities to find missing participants. A national registry for ‘lost and found’ retirement plans would be created at the Department of Labor to assist the plan sponsor in carrying out this fiduciary duty.
Self-Corrections and Penalties: The existing Employee Plan Compliance Resolution System [EPCRS) would be changed to allow more types of plan administration errors to be self-corrected, and would be extended to inadvertent IRA errors. The change amending IRC 401(a), 408(p) and 408(q), would also automatically exempt some described failures to take required minimum distributions (RMDs) from the draconian 50% excise tax.
First Responders: First responders would be able to exclude from gross income service-connected disability pension payments, but only after they reach retirement age. This change would become effective after 2027.
Roth Accounts:
SIMPLE and SEP Roth IRAs: SIMPLE and SEP IRAs would become able to accept Roth contributions. Along the same lines, the employee would also be able to elect to treat both employee and employer contributions as Roth contributions (either in whole or in part.) If passed, this provision would amend IRC 408A and would be effective starting in 2023.
Catch-up Roth Contributions: This rule change would require that all catch-up contributions to a qualified plan by the plan participant would be subject to Roth tax treatment, i.e. after-tax contributions. If passed, this provision would amend IRC 414 would become effective starting in 2023.
Roth Employer Contributions: Currently a plan sponsor is only permitted to provide the employer’s matching contributions to a 401(k) plan on a pre-tax, i.e. non-Roth, basis. This rule change would enable the plan participant to receive an employer’s matching contributions on a Roth-basis. If passed, this provision would amend IRC 402(A) and would be effective as of the date of enactment.
Enhanced Saver’s Credit:
Rather than have this tax credit decline as the individual’s reported income increases, the change would set the applicable percentage of the individual-saver’s credit at a fixed 50%. In addition, this tax credit would be extended to individuals who report higher levels of adjusted gross income, i.e. the tax credit would still be phased out but only at higher income levels. This change that would amend IRC 258 would become effective in 2027.
Student Loan Payments as Elective Deferrals:
This change would permit a plan sponsor (employer) to make contributions under a 401(k), 403(b) or SIMPLE IRA plan with respect to qualified student loan payments, which is broadly defined as any indebtedness that is incurred by the employee solely to pay qualified higher education expenses of the employee. Government employers would also be permitted to make matching contributions in an IRC 457(b) plan. This change would become effective starting in 2023.
Automatic Enrollment in Qualified Plans:
401(k) plans and 403(b) plans would be required to automatically enroll participants in the plans upon becoming eligible. Employees would then possess the option of opting out of the plan. The initial automatic enrollment amount would start at 3% but no more than 10% of compensation. Moreover, each year thereafter, the contribution amount would increase by 1% until reaching 10%. Existing 401(k) and 403(b) plans would be ‘grandfathered.’ However, if a small business had 10 or fewer employees, or any new business less than 3 years old, would not be covered by these automatic enrollment rules. This change would become effective starting in 2024.
Conclusion: Remember that only the House of Representatives has passed this legislation. It might ‘die’ in the Senate, or it might ultimately become law, but look nothing like the House’s version of the legislation.