SECURE ACT 2.0: Ready for A Sequel? | Lord Abbett
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Retirement Perspectives

If you enjoy sequels, it looks like you will get one for the SECURE Act.

Read time: 5 minutes

Despite the partisan bickering that tends to dominate virtually every topic in Washington, retirement security has historically enjoyed bipartisan support. And so on the heels of 2019’s Setting Every Community up Retirement Enhancement Act, known as the SECURE Act, we have another major retirement plan savings and security bill making its way through the legislative process. First introduced in the Fall of 2020 but didn’t become law, it was reintroduced on May 5th when the U.S. House Ways and Means Committee passed “Securing a Strong Retirement Act of 2021” (SSRA), dubbed “SECURE Act 2.0.”

Bipartisan sponsorship

SECURE Act 2.0 is co-sponsored by Ways and Means Committee Chairman Rep. Richard Neal (D-Mass.) and the committee’s ranking member, Rep. Kevin Brady (R-Texas). While the original bill included 36 provisions, the new 146-page bill includes roughly 45 provisions, including new “revenue offsets” to help pay for it.

 

SECURE Act 2.0 is follow up legislation to promote retirement plan savings. It enjoys bipartisan support and may pass either this year or 2022.

 

The bill would expand auto enrollment in employer sponsored retirement plans, increase tax credits for small businesses that establish a plan, expand and increase catch-up contributions, incrementally increase the age of which RMDs would begin and expand designated Roth accounts. One key provision would allow employees paying off student loans to receive employer matches to their 401(k) retirement account.

“The retirement crisis in America is real, and will only get worse without easier pathways to saving and encouraging workers to start planning for retirement earlier in life," said Reps. Richard Neal and Kevin Brady in a joint statement. "This legislation expands automatic enrollment, simplifies many retirement plan rules, and strengthens small businesses’ ability to offer workplace retirement plans, to make it easier for Americans to plan for their golden years.

Although SECURE Act 2.0 is bipartisan, we still have a ways to go before the bill could become law. The long road starts with a vote by the full U.S. House of Representatives. IRA and tax specialist Ed Slott believes that the unanimous passage of the bill by Ways and Means signals likely passage by the full House. “There’s nothing politically controversial in here,” he said.1  Assuming that happens, the Senate would then need to review the proposal. Any differences between the Chambers would have to be agreed upon, and lastly, President Biden would need to sign the bill into law.

What’s in the Bill?

Auto-Enrollment

The Bill would require new 401(k), 403(b) and SIMPLE plans to automatically enroll employees, although participants would have the ability to opt out. Deferrals would start between 3% and 10% of compensation with mandatory increases of 1% annually.

Greater Incentives for Small Businesses to Sponsor Plans

The bill creates a new tax credit and expands an existing credit to encourage small businesses to establish a retirement plan. It would increase the 3-year new retirement plan start up credit (for businesses with up to 50 employees) from 50% (of costs) to 100%, with a $5,000 annual cap.

SECURE Act 2.0 also creates an additional new credit to encourage small employers to make employer contributions to their 401(k), offsetting up to $1,000 of employer contributions for each participating employee in the first year and gradually decrease over a 5-year period. The new credit applies to companies with 100 or fewer employees, however, it is phased in based on the number of employees, reaching a maximum at 50 or fewer employees.

Matching Student Loan Payments

Employers would be allowed to “match” employee student loan payments with a contribution to the employee’s retirement plan (401(k), 403(b), or SIMPLE IRA), to the extent the participant was making student loan repayments.

Delays Required Minimum Distributions

The SECURE Act increased the RMD age from 70½ to 72. SECURE Act 2.0 goes even further by increasing the RMD age to 73 starting on January 1, 2022, to 74 starting on January 1, 2029, and to 75 starting on January 1, 2032.

Quicker Eligibility for Part-Time Employees

The Bill requires part-time employees who work for at least 500 hours per year for two years to be eligible to make salary deferrals contributions to a 401(k) plan. Note: The SECURE Act 2019 previously expanded eligibility for part-time workers to contribute to their employers' 401(k) plan. This Bill would continue accelerating part-time worker eligibility by shortening the measurement period to make 401(k) salary deferral contributions from three years to two years.

New Increased Catch-up Contributions (Age 62, 63 & 64)

The bill increases catch-up contributions to $10,000 (indexed to inflation) for individuals age 62 though 64 (but not 65) by the end of the tax year for those who participate in 401(k) and 403(b) plans. Participants in SIMPLE IRA plans would see the catch-up contribution increased to $5000. The legislation retains the existing age 50 catch-up contribution limit.

Revenue Provisions

The bill also includes a number of “revenue raisers” to defray the cost of the bill.  These provisions are estimated to raise more than $27.4 billion over 10 years. 

Roth SIMPLE & SEP IRAs

Under current law a SEP and SIMPLE IRA contribution may not be designated as a Roth IRA. SECURE Act 2.0 would allow these to be designated as Roth IRAs. Therefore, contributions (both employer and employee elective deferrals) to a SEP/SIMPLE that is a designated Roth IRA would not be made with after-tax dollars.

Catch-up Contributions Required to be Roth

A 401(k), 403(b) or 457(b) plan (excluding SIMPLE IRAs) that permits catch-up contributions must require such contributions to be designated Roth contributions.

Employer Matching Contributions as Roth Contributions (Optional)

A 401(a), 403(b) or 457(b) may permit a participant to designate matching contributions as Roth contributions. However, an employer matching contribution that is treated as a Roth contribution will not be excludable from gross income.

Financial Hardship Rules - 403(b) Plans

The Bill’s proposal conforms the hardship distribution rules for section 403(b) plans to those of 401(k) plan, plus the proposal provides that in addition to employee elective deferrals, a 403(b) plan may distribute on account of a participant’s hardship qualified nonelective contributions, qualified matching contributions along with earnings on any such contributions.

Additional Provisions

403(b)s Could Invest in Collective Investment Trusts (CITs)

Under current law 403(b) investments are generally limited to annuities or mutual funds. The bill would expand investment options to include CITs.

403(b) Multiple Employer Plans:

The Bill would allow unrelated employers to join together to offer a Multiple Employer 403(b) plan, including Pooled Employer Plans (PEPs).

Indexing IRA catch-up contribution limit

It would index the IRA (Traditional/Roth) age 50-catch up contribution ($1000) for inflation. Interestingly, the 401(k) age 50 catch up limit is already indexed.

Penalty Reduction – Failing to take a RMD

The bill reduces the penalty tax for failure to taken an RMD from 50% to 25%. Plus, the tax is reduced to 10% for retirees that take the missed RMD before an IRS audit.

Repayment of Qualified Birth or Adoption Distribution

The Bill requires a qualified birth or adoption withdrawal to be repaid in 3 years.

Penalty-free Withdrawals for Domestic Abuse Victims

It creates a new exception to the 10% early distribution penalty for pre-59½ distributions in cases of domestic abuse. The withdrawal would be the lesser of (1) 50% of the current account balance or (2) $10,000. What’s more, such individuals would be able to pay back (roll over) the distribution up to 3 years.

Qualified Charitable Distributions

The Bill indexes the annual $100,000 QCD limit for inflation.

Distribution for Firefighters

The Bill contains a provision to expand the age 50 exception for qualified public safety employee to also apply to private-sector firefighters receiving distributions from a qualified retirement plan or 403(b) plans.

Qualified Longevity Annuity Contracts (QLAC)

The Bill eliminates the requirement that premiums for QLACs be limited to 25% of an individual’s account balance. Therefore, a retiree could use all their retirement account assets (up to $135,000) to purchase a QLAC.

Military Spouses

It offers a tax credit to small employers who offer military spouses a retirement plan with favorable eligibility and an accelerated vesting schedule.  The employer would be eligible for a tax credit of up to $500 (per military spouse) for 3 years.

Retirement Savings Lost and Found

The bill would create a national, online database “Retirement Savings Lost and Found” to help participants track down lost retirement accounts and The Office of the Retirement Savings Lost & Found to manage it.

Small Immediate Financial Incentives for Contributing to a Retirement Plan

It would allow for “de minimis” financial incentives for participants to contribute to a 401(k) plan.

Key Takeaways:

  • If passed, SECURE Act 2.0 would continue to tweak the rules for contributing to and withdrawing from retirement savings vehicles.
  • Two of the biggest changes are mandatory auto-enrollment in newly established retirement plans and raising the mandatory age for RMDs.
  • The legislation enjoys strong bipartisan support and may pass either this year or in 2022.

 

1 Waddell, Melanie, “Secure Act 2.0 Rules Leave Ed Slott, Advisors Puzzled,” ThinkAdvisor, May 11, 2021

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