Much like last year at this time, retirement legislation is gaining steam In Washington. The Securing a Strong Retirement Act of 2022 (Secure Act 2.0) was passed by the House on March 29th . The bill has the same focus that the original Secure Act had when it became law in 2019. Washington believes that more needs to be done so that employees can save for retirement. The bill, along with the Senate’s version, expands retirement coverage in hopes of increasing retirement savings. Many of the provisions were put forth in the 2021 versions and generally they have wide Congressional support.
Secure 2.0 focuses on enhancements to individual limits and plan provision changes that make plan access easier or more robust. In some instances, the plan provision changes are required.
- Increase the number of individuals eligible for the saver’s credit. The saver’s credit is a credit that certain individuals can receive on their tax return if they contribute to 401(k) style plans or an IRA. This would be effective for tax years after December 31, 2026.
- Increase the beginning age for required minimum distributions (RMD) to 73 in 2023, 74 in 2030, and 75 in 2033. In addition, there would be a reduction in the 50% penalty to generally 25% for failure to take an RMD. Penalty relief would be effective after December 31, 2022.
- Increased catch-up contribution limits for older individuals to 401(k) plans, 403(b) plans, and governmental 457(b) plans. Individuals age 62, 63, or 64 could make catch-up contributions of $10,000. Currently, individuals older than age 50 can contribute an additional $6,500. Increased catch-up contribution limits for older individuals to SIMPLE 401(k) plans and SIMPLE IRAs. Individuals who are age 62, 63, or 64 could make catch-up contributions of $5,000. Currently, individuals older than age 50 can contribute an additional $3,000. This provision would be effective for taxable years beginning after Dec. 31, 2023.
Plan Provision Enhancements
- Giving employers the option of allowing employees to elect Roth treatment of their 401(k) matching contribution. Currently, all employer contributions are treated as pre-tax contributions and taxable with earnings at distribution. Roth matching contributions would grow tax-free. This provision would be effective sometime after the bill is enacted.
- Additional expansion of eligibility for long term part-time workers. Part-time workers that worked at least 500 hours per year for two years would be required to be offered eligibility to contribute to 401(k) plans. This is a reduction from the three year period under the initial Secure Act. This would be effective for plan years beginning after 12/31/2022.
- Employers who sponsor 401(k) and 403(b) plans would be required to automatically enroll employees at a rate of at least 3% of pay which would automatically increase to at least 10%, capped at a maximum of 15% of pay. Certain employers would be exempt from this requirement. This would be effective for plan years beginning after December 31, 2023.
- Allow employers to adopt a plan provision to treat certain student loan repayments as employee salary deferrals for employer matching contribution purposes. Eligible plans include 401(k), 403(b), governmental 457(b), and SIMPLE IRA plans. Effective for plan years that begin after December 31, 2022.
The bill has many more provisions that include enhanced credits, changes to retirement plan testing and corrections, modified disclosure requirements as well as other miscellaneous changes. However, it should be noted that retirement legislation historically moves very slowly. We were convinced at the start of 2021 that the Secure Act 2.0 would have been passed by years end and virtually no rule changes came to fruition. Even after bills are passed, it takes additional time for regulatory agencies to pass guidance on how the rules actually work. Employers and individuals alike should keep an eye on the prospect for changes by year-end.
If you have questions about the Secure Act 2.0, please contact Mark Flanagan of Aronson’s Compensation and Benefits Practice at 301.231.6257.