There will be fundamental changes to retirement legislation if the Senate passes the SECURE Act 2.0, which the House of Representatives overwhelmingly passed by a vote of 414 to 5 in March.
This bill expands on the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which also had bipartisan support when former President Donald Trump signed it into law in December 2019. The bill is now in the Senate, where lawmakers are expected to attempt to incorporate provisions from other House and Senate bills.
In its current form, the new bill proposes a slew of changes meant to help Americans save more for their retirement. Some of the key provisions include:
According to SECURE Act 2.0, any company that institutes a new retirement plan must automatically enroll any new employees as soon as they are eligible. Initially, the employee’s pretax contribution would be 3% of their paycheck, after which it would rise every year by 1% to a minimum of 10% but no greater than 15%.
Participants can choose a different contribution level or opt out altogether. The provisions would apply to any new 401(k) and 403(b) plans created after the legislation is enacted. Exceptions apply, though, for small businesses that have been operating for under three years or that have 10 or fewer employees, for church plans and for government plans.
Increased Catch-Up Contributions
Starting in 2024, the SECURE Act 2.0 increases annual catch-up contributions to $10,000, indexed for inflation, for those between 62 and 64. However, limits would remain the same for 50-year-old participants, namely $6,500, indexed every year for inflation, up to a total contribution of $27,000.
Beginning in 2023, catchup contributions to all employer- sponsored plans must be paid into Roth accounts, so taxes would have to be paid now.
Delayed Mandatory Distributions
Currently, employer-sponsored defined contribution plans and traditional individual retirement accounts require participants to start taking redundant minimum distributions at age 72. The new bill would gradually extend the age to 75 by 2033.
The Wall Street Journal points out that though this provision could help those who can afford to wait not to draw on their money, it might also lead them to pay higher taxes as they would be withdrawing more money every year due to the reduced time frame. However, delaying these required minimum distributions could incentivize more Roth conversions after retirement but before the distributions kick in.
Expanded Eligibility for Part-Time Workers
The previous Secure Act provided long-term part-time workers with the opportunity to contribute to their employer’s 401(k) plans. The new bill would reduce the time frame from three to two years, so part-time workers could start contributing sooner.
Student Loan Matching
The bill also enables companies to offer employees matching retirement contributions when they make student loan payments. These matching contributions would fund the employee’s 401(k) plan, 403(b) plan, or SIMPLE IRA as they make their student loan payments.
This could help the many Americans who cannot save because of their monthly student loan payments. This goal is articulated in the Act itself: “The idea is that employees who are overwhelmed with student debt may not realistically be able to save for retirement, and thus are missing out on available matching contributions.” As a 2019 TIAA – MIT AgeLab study points out, 26% of Americans who aren’t currently saving for their retirement would like to, and this provision would help them.
Another interesting provision the bill puts forward refers to creating an online database that would allow employees and retirees to locate any retirement accounts that might have been lost due to employers going out of business or merging with other organizations.
The bill also implements a tax credit for small businesses offering savings plans of up to $1000 per worker. It would also expand self-correction opportunities, increase awareness of the Retirement Savings Contributions Credit, and apply certain features of 401(k) plans to 403(b) plans.
What the SECURE Act 2.0 Doesn’t Address
While the SECURE Act 2.0 will undoubtedly improve the retirement system, it fails to address two significant issues: Social Security and limited retirement plan enrollment.
The Social Security trust fund is expected to run out of money by 2033, according to a 2021 government report. This would lead to a 20% loss in benefits for retirees, which could have disastrous effects on many Americans. Unfortunately, the SECURE Act 2.0 doesn’t lay out any provisions that would help fix this issue.
According to the Federal Reserve, approximately half of American households are not contributing to any form of retirement plan. While the secure 2.0 act would require automatic enrollment, it is only for newly instituted plans and not existing ones. Furthermore, small businesses are exempt. In other words, this provision is unlikely to significantly impact the current situation.
This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. © 2022 Zywave, Inc. All rights reserved.