SECURE Act 2.0: New Retirement Plan Incentives

The “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act) was passed by Congress in 2019 to address the retirement savings crisis in our country. It introduced a number of changes to retirement plans with the goal of making it easier for workers to save and encouraged them to start planning for retirement earlier in life. A second phase of legislation is currently awaiting approval by Congress. Formally the “Securing a Strong Retirement Act of 2021,” but dubbed “SECURE Act 2.0,” it continues to tweak the rules for contributing to and withdrawing from retirement savings vehicles by making the processes even easier. It is widely expected that the bill will pass either this year or in 2022, given its strong bipartisan support and the nearly unanimous backing of the original SECURE Act. The key provisions of the proposed legislation are as follows:

• Additional Delay for RMDs – The original SECURE Act increased the age for taking required retirement plan distributions from age 70-1/2 to 72. SECURE Act 2.0 would further increase the required distribution age to 73 starting in 2022, increasing to 74 in 2029, and 75 in 2032.
• Mandatory Auto Enrollment – New 401(k), 403(b) and SIMPLE plans established after 2021 would be required to use automatic enrollment with an employee pre-tax contribution of 3% of compensation. The default contribution would increase 1% annually, up to 10% of pay. Participants could always override this by affirmatively electing a different contribution amount or opting out altogether. The mandatory automatic enrollment would not apply to existing plans.
• Participation Incentives – Employers are currently prohibited from providing financial incentives (aside from matching funds) to encourage their workers to contribute to a 401(k) account. The proposed legislation would change that by allowing employers to provide small incentives (e.g., gift cards), as an additional lure to get employees saving for retirement.
• Increased Catch-up Contributions – Under current law, 401(k) plan participants age 50 or older may make additional pre-tax contributions of up to $6,500 annually. SECURE Act 2.0 would increase this to $10,000 for participants ages 62-64, beginning in 2023. However, as a revenue raiser, effective in 2022, all catch-up contributions would be required to be made as Roth after-tax contributions. In addition, employers could amend their plans to allow participants to elect Roth tax treatment on all or a portion of their matching contributions. For participants who do this, matching contributions would be included in their taxable income but would not be taxed when distributed. Plans that allow catch-up contributions but do not contain Roth contribution provisions will need to be amended to add them, with accompanying payroll and plan administrative changes to ensure proper treatment.
• Matching Contributions on Student Loan Repayments – Traditionally, employers match participants’ contributions to their retirement accounts. But some workers may be unable to fund their retirement account as they prioritize paying down student loans. The proposed legislation would allow employers to make matching contributions to workers’ retirement accounts based on workers’ own student loan payments. This would apply to 401(k) plans, 403(b) plans, SIMPLE IRAs, and 457(b) plans.
• Part-Time Employees – Under the original SECURE Act, part-time employees who work at least 500 hours in a 3 consecutive year period may participate in the employer’s 401(k) plan. SECURE Act 2.0 would reduce this to 2 consecutive years.

In addition to the above, there are several additional provisions being considered:

• The creation of a national database for tracking retirement plan accounts of missing participants.
• Allowing after-tax Roth contributions to SEP and SIMPLE plans (not previously permitted).
• Allowing 403(b) custodial accounts to invest in collective investment trusts if certain conditions are met (currently 403(b) plans can generally only invest in annuity contracts and mutual funds).
• Providing a grace period for plan sponsors to correct automatic enrollment and automatic increased contribution errors. These errors could be corrected within 9-1/2 months of the following year without any issue.
• Limiting the steps an employer may take to recoup excess plan payments from participants.

It is highly likely that modifications will be made to the provisions above. However, given the likelihood that the bill will pass in some form, it is important for plan sponsors to be aware of the proposed changes and have a plan in place to implement the optional and required provisions.

If you have questions about the information outlined above, our seasoned and experienced employee benefit plan professionals are here to help. You can learn more about our Employee Benefit Plan services by visiting our website and don’t hesitate to contact Dan Sturm, Partner & Director of ERISA Services at dsturm@macpas.com.

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