Secure Act 2.0 – An Update On Potential Provisions
Many Americans struggle to save for retirement and to help their opportunities for greater retirement security, earlier this year the House of Representatives passed the Securing a Strong Retirement Act. Two Senate committees also advanced their own retirement savings-focused legislative proposals, the RISE & SHINE Act from the Health, Education, Labor, and Pensions Committee, and the EARN Act from the Finance Committee.
A combination of the provisions provided in these three acts may ultimately create the final version of what has been dubbed the SECURE Act 2.0. Some of the significant provisions that may result from this congressional focus on retirement savings include the following:
- Mandatory Automatic Enrollment & Escalation
- Employers that establish defined contribution plans would be required to automatically enroll new employees, when eligible, in the plan at a pre-tax contribution level of 3% of the employee’s pay.
- This level would increase annually by 1% up to at least 10% but not more than 15% of the employee’s pay. Employees could elect a different contribution.
- Exceptions are made for small businesses with 10 or fewer employees, new businesses (those in business for less than 3 years), church plans, and governmental plans.
- Expansion Of Catch-Up Contributions & Roth Tax Treatment
- Increasing the annual catch-up amount to $10,000 for participants ages 62 through 64, beginning 2023. This higher limit would also be indexed for inflation.
- Currently, the catch-up amount for individual retirement account (IRA) contributions is $1,000 (not indexed) for individuals who have reached age 50. The SECURE Act 2.0 indexes this limit for inflation starting in 2023.
- Currently, catch-up contributions to qualified retirement plans offered by employers can be made on a pre-tax or Roth basis (if the plan sponsor permits). SECURE Act 2.0 provides that starting 2023, all catch-up contributions to employer-sponsored qualified retirement plans would be subject to Roth tax treatment.
- Allowing Roth Matching Contributions
- Plan sponsors would have the option of permitting employees to elect some or all of their matching contributions to be treated as Roth contributions for 401(k) plans.
- Employer matching contributions designated as Roth contributions would not be excludable from employees’ gross income.
- Delaying Mandatory Distributions
- The original SECURE Act increased the age at which plan participants are required to begin taking mandatory distributions to 72.
- SECURE Act 2.0 increases the required minimum distribution age to 73 in 2022, 74 in 2029, and 75 in 2032.
- Expediting Part-Time Workers’ Participation
- The original SECURE Act expanded eligibility for long-term, part-time workers to contribute to their employers’ 401(k) plan.
- SECURE Act 2.0 expedites the addition of long-term, part-time workers as eligible participants by shortening from 3 to 2 years the period for eligibility that starts in 2021.
- Authorize Student-Loan Matching
- While the IRS has opened the door to allowing employers to make 401(k) matching contributions based on employees’ student-loan payments, even if employees aren’t making retirement contributions themselves, compliance concerns have been a sticking point due to the absence of authorizing legislation.
- SECURE Act 2.0 would provide the needed statutory basis for employers to adopt this feature. The matching contributions for student loan payments must vest under the same schedule as other matching contributions, such as 401(k) contributions.
Bipartisan support for many of these provisions make it likely that a bill will end up on the president’s desk by year-end.