On the heels of 2019’s SECURE Act (Setting Every Community Up for Retirement Enhancement Act), there currently is broad bipartisan congressional support for additional retirement plan legislation providing incentives to increase employees’ retirement savings. The House and Senate have drafted substantially similar bills which are working their way through the legislative process. Nicknamed “SECURE Act 2.0,” the provisions are expected to pass this year as a stand-alone bill or included in a broader budget, spending or tax reform package. The key provisions, subject to potential modification, are:
Mandatory Automatic Enrollment.
To facilitate broad-based plan participation, new 401(k) plans (and 403(b) and SIMPLE plans) established after 2021 must use automatic enrollment with an employee pre-tax contribution of 3% of compensation. The default contribution will increase 1% annually up to 10% of pay. Participants may always override this by affirmatively electing a different contribution amount or opting out altogether. This mandatory automatic enrollment does not apply to existing plans.
Additional Delay for Required Minimum Distributions (RMDs).
The original SECURE Act increased the age for taking required retirement plan distributions from age 70-1/2 to 72. SECURE Act 2.0 further increases the required distribution age to 73 starting in 2022, increasing to 74 in 2029 and 75 in 2032.
Increased Catch-Up Contributions with a Change to Roth Tax Treatment.
Under current law, 401(k) plan participants age 50 or older may make additional pre-tax contributions of up to $6,500 annually. SECURE Act 2.0 increases this to $10,000 for participants age 62-64, beginning in 2023. However, as a revenue raiser, effective in 2022, all catch-up contributions must be made as Roth after-tax contributions. In addition, employers may amend their plans to allow participants to elect Roth tax treatment on all or a portion of their matching contributions. For participants who do this, matching contributions would be included their taxable income but would not be taxed when distributed. Plans that allow catch-up contributions but do not contain Roth contribution provisions will need to be amended to add them, with accompanying payroll and plan administrative changes to ensure proper treatment.
More Favorable Provisions for Part-Time Employees.
Under the original SECURE Act, part-time employees who work at least 500 hours in a 3 consecutive year period may participate in the employer’s 401(k) plan. SECURE Act 2.0 reduces this to 2 consecutive years.
Matching Contributions Tied to Student Loan Repayments.
To encourage 401(k) plan participation by younger employees who may not participate due to student loan obligations, SECURE Act 2.0 would permit employers to make matching contributions to the plan tied to the employee’s student loan repayments. Because this would most likely be a non-highly compensated employee group, it could help employers pass the 401(k) nondiscrimination tests, which prevent plans from favoring highly compensated employees. While this optional provision may help a certain subset of an employer’s employees, it could alienate others, and it also complicates plan administration. More details are expected.
- Creates a national database for tracking retirement plan accounts of missing participants.
- Allows after-tax Roth contributions to SEP and SIMPLE plans, not previously permitted.
- Provides a grace period to correct automatic enrollment and automatic increased contribution errors. These errors may be corrected within 9-1/2 months of the following year without any issue.
- Limits the steps an employer may take to recoup excess plan payments from participants.
Undoubtedly, additional modifications will be made, but given the likelihood that the bill will pass in some form, it is important for plan sponsors to be aware of the proposed changes and have a plan in place to implement the optional and required provisions.