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SECURE Act 2.0? How Retirement Plans Might Change

ImageAs part of a larger spending package that was signed into law on December 20, 2019, Congress passed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act’s goal was to improve retirement plan access and make it easier for small businesses to manage group plans. Today, Congress is considering passing a SECURE Act 2.0. This law has been in the works for months, but members of Congress are approaching an agreement, and it’s likely we will see a SECURE Act 2.0 passed later this year. Here’s what you can expect from the new bill.

Automatic Enrollments & Increases

The original SECURE Act encourages employers to automatically enroll participants in their retirement plans by providing a tax credit to those who add this feature to their plans. Automatic enrollments tend to improve participation rates for the businesses (which can reduce per-participant costs) and increase retirement savings for participants. 

The SECURE Act 2.0 hopes to expand this feature by requiring employers to have an automatic enrollment feature on newly created 401(k)s, 403(b)s, and savings incentive match plans for employees (SIMPLE plans). Participants would be automatically enrolled in these retirement plans at 3% of their salary unless they opt out. 

In addition to automatic enrollments, participants’ contribution percentages would automatically increase by 1% of their salary each year until their contribution reaches 10%. Just like with the automatic enrollment, employees would be able to opt out of automatic increases.

Very small businesses – those with fewer than 10 employees – would be exempt from these requirements. 

Increase RMD Age

Most retirement plans require participants to begin drawing from their accounts once they reach a certain age. The distributions they’re required to take (called required minimum distributions – RMDs) vary based on the account value and the participant’s age, life expectancy, and working status. Individuals who do not withdraw all that is required must pay a penalty of up to 50% of their annual RMDs.

The original SECURE Act raised the RMD age from 70 ½ to 72. The SECURE Act 2.0 hopes to raise it to 75. This feature would get phased in slowly over the next ten years. The SECURE Act 2.0 also proposes lowering the penalty from 50% to 25%, or to as low a 10% if the individual corrects their mistake in a timely manner. These changes would give retirees more freedom over their investment earnings. If they do not need the money, they can let their retirement savings grow tax-free for a few more years before pulling from their balance.

Increase Catch-Up Contributions

The IRS limits the amount individuals can contribute to tax-deferred retirement plans. In 2021, individuals can contribute – in total – up to $19,500 to one or more qualified retirement plans. To encourage older individuals to save for retirement, those age 50 and up can make catch-up contributions of an additional $6,500 each year. The SECURE Act 2.0 proposes raising the catch-up contribution to $10,000 for those age 62 through 64.

Other Changes

The SECURE Act 2.0 also proposes:

    • Retirement matching on student loan payments.
      Some employees prioritize paying down student loans before saving for retirement. Under the SECURE Act 2.0, employers would be permitted to make matching contributions into employees’ retirement accounts based on those employees’ annual student loan payments. This would simultaneously encourage individuals to pay down student loans and help them save for retirement.
    • Allowing part-time workers to participate in retirement plans. Currently, part-time employees who are working at least 500 hours per year for three consecutive years can participate in employer-sponsored plans. The SECURE Act 2.0 would drop this down to two years.
    • Expanding 403(b) investment options.
      403(b) plans would be free to invest in collective investment trusts in addition to annuity contracts and mutual funds.
    • Establishing a national database for lost retirement plans. Retirement plan sponsors sometimes lose contact with participants, especially when participants are no longer employees of the company. A national database for retirement accounts would make it easier for employers to find participants and for investors to track down their accounts.
    • Accepting ROTH contributions from employees.
      The SECURE Act 2.0 would allow participants in SIMPLE or SEP IRAs to make ROTH contributions to their plans. ROTH contributions are already available on 401(k), 403(b), and 457(b) plans. It would also allow employers to match with ROTH contributions rather than restricting matches to pre-tax dollars.
    • Expanding multiple employer plans.
      The original SECURE Act allowed unrelated employers to establish and manage a single open 401(k) plan. These multiple-employer plans (MEPs) reduce costs for both the participants and the employers. The SECURE Act 2.0 would allow 403(b) plans to operate as MEPs, as well.
    • Simplifying plan administration.
      Plan administration can be burdensome on employers, and the SECURE Act 2.0 hopes to ease some of those obligations. Some of the changes discussed are:
        • Simplifying annual disclosure requirements.
        • Expanding the opportunities to self-correct mistakes.
        • Making it easier to retrieve overpayments that were made to retirees.

What to Expect

The SECURE Act 2.0 is still in flux. Last year, the Senate introduced a retirement plan bill called the Improving Access to Retirement Savings Act, and in May, the House Ways and Means Committee passed a sister bill called the Securing a Strong Retirement Act. The hope is that these bills will merge to form a SECURE Act 2.0. Currently, a second SECURE Act has large bipartisan support, so we anticipate a bill will be passed later this year. We cannot know for sure what this combined bill will look like, but we expect it to include most of the provisions we’ve discussed above.

If you want to know how you can prepare for these changes as a plan sponsor or as an individual participating in an employer-sponsored plan, reach out to your Meaden and Moore advisors today.

Michelle Buckley is a Vice President in Meaden & Moore’s Assurance Services Group with 23 years of public accounting experience.

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