SECURE Act 2.0: Retirement Security is Again on the Congressional Agenda

Americans saw a number of changes to their retirement savings plans when the Setting Every Community Up for Retirement Enhancement Act, or the SECURE Act, was passed two years ago. Get ready for more.

The House Ways and Means Committee recently voted unanimously to advance a second bill, the Securing a Strong Retirement Act of 2021, that would continue to enhance the rules for contributing to and withdrawing from retirement savings vehicles, while providing tax incentives for small business owners.

Nicknamed the SECURE Act 2.0, the legislation was introduced by Reps. Richard Neal, D-Mass, and Kevin Brady, R-Texas, and aims to encourage Americans to save more for retirement, in part by making that process easier, while keeping burdensome reporting requirements off plan sponsors. It’s widely expected the bill will pass in Congress either later this year or in 2022, given its strong bipartisan support and the nearly unanimous backing of the original SECURE Act.

Key provisions of the SECURE Act 2.0 include the following:

Increase the Required Minimum Distribution Age… again
The original SECURE Act raised the age at which you must start taking required minimum distributions (RMDs) from traditional IRAs, 401(k)s and 403(b) plans from age 70½ to 72. The proposed legislation would again raise the age to begin taking RMDs, this time to age 75 over a decade. That means you could have more time for your money to grow tax free, but if you delay RMDs, your withdrawals may need to be larger.

In the new bill, the age for RMDs would initially increase to 73 starting in 2022, then to age 74 in 2029 and age 75 in 2032.

Expanding Automatic Enrollment/Escalation for New Plans
The legislation would require defined contribution plans established after 2021 to automatically enroll eligible workers at a pre-tax savings rate of 3% of pay — although workers always have the option to opt out or opt to save less or even more, up to annual contribution limits. Auto-enrolled employees’ contribution rates would automatically increase each year by 1% up to at least 10% (but no more than 15%). There are exceptions for small businesses with 10 or fewer employees, businesses which opened fewer than three years ago and retirement plans for churches and government agencies.

Raise and “Roth-ify” Catch-Up Contribution Limits
Under current law, employees age 50 and older can make extra catch-up contributions to a 401(k) or similar plan. This limit on catch-up contributions for 2021 is $6,500, indexed annually for inflation. The proposed provisions would keep the catch-up age at 50 but increase the limit by an additional $10,000 per year for employees at ages 62, 63 and 64 beginning in 2023.

Under current law, catch-up contributions can be made on a pre-tax or Roth basis. SECURE Act 2.0 provides that effective in Jan. 1, 2022, all catch-up contributions to qualified retirement plans must be made on an after-tax, Roth basis.

Currently, the catch-up limit for IRAs is $1,000 (not indexed) for individuals who have reached age 50. SECURE Act 2.0 indexes this limit for inflation starting in 2023.

Roth-ification of Employer Matching Contributions
Plan sponsors may, but are not required, to permit employees to elect that some or all of their matching contributions be treated as Roth contributions. Employer matching contributions designated as Roth contributions would not be excludable from employees’ gross income.

Student Loan Matching
Traditionally, employers match participants’ contributions to their retirement accounts, but some workers may be unable to fund their retirement account as they prioritize paying down student loans. The proposed legislation would allow, but not require, employers to make matching contributions to employee retirement accounts based on the employee’s own student loan payments. This would apply to 401(k) plans, 403(b) plans, SIMPLE IRAs and 457(b) plans.

Expedited Eligibility for Part-Time Workers
Under the first SECURE Act, companies that offer a 401(k) plan are now required to allow long-term, part-time employees who work at least 500 hours a year for three consecutive years to contribute to a retirement account. This proposal would reduce the three-year rule to two. If passed, the first group of affected workers would become eligible in 2023.

Easier to Find Old Retirement Accounts
It can be challenging for employers to locate former workers, who have changed their name or address, to pay out benefits from a retirement plan. It can also be difficult for workers to locate a former employer if that company has merged or rebranded with another firm. To make this easier, the legislation would create a national online lost-and-found database for retirement plans.

Incentive for Small Businesses to Give Workers Access to a Retirement Plan
Within the new bill, there are several tax credits that small businesses could claim for providing greater access to retirement plans for workers. Employers with up to 50 workers would be able to offset start-up costs from 50% to 100%.

What’s Next?
It’s important to note that while the changes above are perhaps some of the most significant, there are many other provisions in SECURE Act 2.0. These provisions are subject to change as they are almost always modified as they move through the legislative process. At Greenleaf Trust, we are committed to planning for change and keeping our plan sponsors and participants informed and compliant with any legislative updates.