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SECURE 2.0 passes another milestone: What you need to know
Jason Bortz
April 26, 2022
KEY TAKEAWAYS
- Retirement legislation, referred to as the SECURE Act 2.0, has been passed by the U.S. House of Representatives and moves on to the Senate.
- The legislation seeks to expand the use of auto enrollment, provide incentives for small business owners to offer plans, and further raise the age for required minimum distributions (RMDs).
- Financial professionals may want to start thinking now about how potential changes affect their clients.
The SECURE Act, short for Setting Every Community Up for Retirement Enhancement Act, passed in 2019 and was the first step on the road toward modernizing the retirement system in the United States. Subsequent legislation, nicknamed SECURE Act 2.0, seeks to build on the SECURE Act’s momentum.
SECURE 2.0 received strong bipartisan support in the U.S. House of Representatives, passing by a wide 414 to 5 margin. It now moves on to the Senate, which has its own retirement legislation on the docket. That bill, introduced by Senators Ben Cardin (D-MD) and Rob Portman (R-OH), has been dubbed the Portman-Cardin bill and shares several provisions with the SECURE Act 2.0.
While the SECURE Act 2.0 is one step closer to becoming law, it still has a long road to walk, and it is likely that enactment may be pushed back toward the end of 2022 or even into 2023. In the meantime, financial professionals may want to review SECURE 2.0’s provisions and help clients prepare for potential changes.
Both versions of the SECURE Act passed in the House by a wide margin
Source: Office of the Clerk, U.S. House of Representatives
What’s in the bill?
There are more than 50 provisions in the SECURE Act 2.0 legislation, and if passed by the Senate in its current form, it would include the following broad categories:
- ACCESS
- Expanded automatic enrollment: It would require newly established defined contribution (DC) plans to automatically enroll eligible participants with at least a 3% contribution rate and increase the rate through auto-escalation by 1% per year until it reaches 10%. Eligible employees have the option to opt out if they do not want to participate in the plan.
- Expedited access for part-time workers: Beginning in 2023, part-time employees who work at least 500 hours a year will be able to participate in 401(k) plans after two years on the job, a shorter timeframe than the current three years.
- Enhanced incentives for plan sponsors: The startup credit for employers with 100 or fewer employees increases to cover 100% of the cost of initiating a 401(k) plan, up from 50%. An additional credit would be provided equal to the applicable percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000.
- This full additional credit would be limited to employers with 50 or fewer employees and phased out for employers with between 51 and 100 employees.
- The applicable percentage would be 100% in the first and second years, 75% in the third year, 50% in the fourth year, 25% in the fifth year, then reduced to zero thereafter.
2. INCREASED SAVINGS
- Bigger contributions for older workers: The annual catch-up amount increases for participants ages 62 to 64 from $6,500 to $10,000 for 401(k) and 403(b) and up from $3,000 to $5,000 for SIMPLE IRA or SIMPLE 401(k) plan participants.
- Support for employees with student loans: Plan sponsors can match employees’ loan repayments with retirement account contributions beginning on January 1, 2023. This provision is aimed at workers who forgo saving for retirement because of high levels of student debt.
3. INCOME PRESERVATION
- Changes to required minimum distributions (RMDs): The bill raises the RMD age from 72 (set by the original SECURE Act) to 75 in three phases:
- from 72 to 73 beginning in 2023;
- to 74 beginning in 2030;
- to 75 beginning in 2033
Delaying RMDs allows participants’ savings to continue to grow and potentially provide increased income when it comes time to draw down assets. Participants with retirement account balances of less than $100,000 would be exempt from taking RMDs.
4. PLAN SIMPLIFICATION
- Revised disclosure requirements: The bill would eliminate the need for plan sponsors to provide notices to eligible, but non-participating employees beginning in 2023. Plan sponsors would still have to provide an annual reminder notice of eligibility.
- Expanded access to collective investment trusts (CITs): CITs have been available in 401(k) plans for some time, but not in 403(b) plans. SECURE 2.0 includes a provision that allows 403(b) plans to offer CITs as investment options.
Revenue raisers
Despite the enhancements, SECURE 2.0 actually raises revenue, largely through the expansion of Roth savings. Starting in 2023, all catch-up contributions made to 401(k) or 403(b) plans would have to be made to Roth accounts. Traditional IRA and SIMPLE IRA plans are exempt from this rule. In addition, employers could permit employees to elect to treat employer-matching contributions as Roth contributions.
Similar to the original SECURE Act, some of these provisions would be effective immediately upon enactment, while others have a longer lead time before going into effect.
Additional retirement provisions possible
The Portman-Cardin bill in the Senate overlaps in most respects with SECURE 2.0 but includes a handful of additional provisions, including a new automatic enrollment safe harbor for “Secure Deferral Arrangements” that provide for stretch matching contributions. The concept of “stretching the match” essentially requires employees to contribute more to their retirement plans to receive the maximum employer contribution — for example: 100% on first 2%; 50% on next 4%; and 20% on next 6%. People call it stretch because it’s meant to be the same employer cost as other safe harbor matches but stretched to higher deferral levels, up to 10%.
In addition, the Senate is working on other retirement legislation that may be folded into SECURE 2.0, with a particular focus on addressing the fact that many working Americans do not have sufficient emergency savings. One idea is for a new in-plan option that allows plan participants to build an emergency savings fund alongside their retirement savings; the new option would have separate contribution limits and investment limitations.
Helping clients prepare
Saving for retirement consistently ranks among Americans’ top financial worries. The SECURE Act 2.0’s provisions provide much-need opportunities for workers to increase their retirement savings while giving retirees more flexibility to preserve their assets and create income for later in life — goals that are supported by both parties. Given such broad bipartisan support and the relative ease with which it passed through the House, SECURE 2.0 has a good chance of moving forward in the Senate.
While the timing of enactment is unclear, SECURE 2.0 is garnering enough attention in the press that clients may have questions. As a result, financial professionals may want to familiarize themselves with the bill’s proposed provisions to better help clients prepare for any potential changes.
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