SECURE Act 2.0 – Watch Out For New Incentives For Retirement Plans | Vandeventer Schwarz LLP
Under the SECURE Act of 2019 (Setting Every Community Up for Retirement Enhancement Act), there is currently broad bipartisan support from Congress for additional retirement plans that provide incentives to increase employee retirement benefits. The House of Representatives and the Senate have drawn up essentially similar bills that will prevail in the legislative process. Nicknamed the SECURE Act 2.0, the provisions are slated to be passed as a stand-alone bill this year or incorporated into a broader budget, spending or tax reform package. The main provisions, subject to possible changes, are:
Compulsory automatic registration.
To enable widespread plan participation, new 401 (k) plans (and 403 (b) and SIMPLE plans) established after 2021 must use automatic enrollment with an employee contribution of 3% of pre-tax pay. The standard contribution increases annually by 1% up to 10% of the wage. Participants can override this at any time by agreeing to a different contribution amount or by unsubscribing entirely. This mandatory automatic registration does not apply to existing plans.
Additional delay for minimum required distributions (RMDs).
The original SECURE Act raised the age at which the required retirement plan payouts were required from 70-1 / 2 to 72 years. SECURE Act 2.0 further increases the required payout age to 73 years from 2022, to 74 years in 2029 and 75 years in 2032.
Increased catch-up contributions when changing the Roth tax treatment.
Under applicable law, 401 (k) plan participants who are 50 years of age or older may make additional pre-tax contributions of up to $ 6,500 annually. SECURE Act 2.0 will increase this to $ 10,000 for participants ages 62 to 64 starting in 2023. As a source of income, however, from 2022 all catch-up contributions must be made as Roth contributions after taxes. In addition, employers may change their plans to allow participants to choose Roth’s tax treatment for all or part of their matching contributions. For participants who do so, matching contributions would be included in their taxable income but would not be taxed on distribution. Plans that allow supplementary contributions but do not contain Roth contribution regulations must be supplemented, with accompanying wage and plan administration changes to ensure proper treatment.
Cheaper regulations for part-time workers.
Under the original SECURE Act, part-time workers who work 500 hours or more over a period of 3 consecutive years can participate in the employer’s 401 (k) plan. SECURE Act 2.0 reduces this to 2 consecutive years.
Contributions linked to student loan repayments.
To encourage participation in the 401 (k) plan by younger employees who are unable to participate due to student loan obligations, SECURE Act 2.0 would allow employers to make appropriate contributions to the plan that are tied to the employee’s student loan repayments . As this is most likely an under-paid group of workers, this could help employers pass the 401 (k) anti-discrimination tests, which prevent plans from favoring high-paid workers. While this optional provision may help a specific subset of an employer’s workers, it could alienate others and also make plan management difficult. Further details are expected.
- Creates a national database for tracking pension plan accounts of missing participants.
- Enables Roth after-tax contributions for SEP and SIMPLE plans that were not previously allowed.
- Provides a grace period to correct auto-registration errors and auto-incremented posts. These errors can be corrected without problems within 9-1 / 2 months of the following year.
- Limits the steps an employer can take to get back excess plan payments from attendees.
More changes will undoubtedly be made, but given the likelihood that the bill will be adopted in some form, it is important for plan sponsors to be aware of the proposed changes and have a plan to implement the optional and required provisions.