In a move that could greatly change the retirement landscape in America, last week the House of Representatives passed SECURE Act 2.0 (the follow-up to 2019's SECURE Act) by an overwhelming vote of 414 to 5. The bill now goes on to the Senate, which is working on its own version of the legislation. The House version of SECURE 2.0 would require most employer-sponsored retirement plans to automatically enroll workers, make it easier for student-loan borrowers to amass savings, and lower retirement plan administration costs for small businesses, among other measures. Here is what it means for your company's retirement plan:
- Mandatory Automatic Enrollment/Escalation – New defined contribution plans will be required to automatically enroll eligible employees with a 3% contribution and implement an automatic contribution increase of 1% each year, up to at least 10% (but not more than 15%) of the employee's pay.
- Super-charge and 'Roth-ify' Catch-Up Contributions – People who are 62, 63, and 64 will be able to super-charge their catch-up contributions up to $10,000, compared to $6,500 now. In addition to this increase, all catch-up contributions to employer-sponsored qualified retirement plans would be subject to Roth post-tax treatment. Both will take effect in 2023.
- Allow Roth Matching Contributions – Plan sponsors will now have the option to allow employees to elect some or all their matching contributions to be treated as Roth contributions and not be excluded from their gross income. Currently, all matches are made on a pre-tax basis.
- Delay Mandatory Distributions – The SECURE Act of 2019 increased the age at which participants had to begin taking required minimum distributions (RMDs)from their employer-sponsored defined contribution plans and traditional (non-Roth) individual retirement accounts (IRAs) to 72, from 70½. SECURE Act 2.0 further increases the age to 73 in 2023, 74 in 2030, and 75 by 2033.
- Expedite Part-Time Workers' Participation – The original SECURE Act set a 3-year timeline for part-time workers to be able to start contributions to their employers’ 401(k) plans. SECURE 2.0 shortens that timeline from three years to two, making the first group eligible as of January 1, 2023.
- Authorize Student-Loan Matching – SECURE 2.0 will provide a statutory basis for employers to adopt matching contributions based on employees' student-loan payments. Student loan payments must vest under the same schedule as other matching contributions.
- Create a tax credit – SECURE 2.0 creates a tax credit of up to $1,000 per employee for small businesses that offer a savings plan. It also provides an improved Saver's Credit for low- and moderate-income workers.
While the legislation still has to be reconciled in the Senate, many changes are widely expected to become law. With the help of a trusted Financial Advisor, getting out in front of these changes will improve your plan and help you stay ahead of the curve. If you want to see how the SECURE Act 2.0 could affect your 401(k), 403(b), or SIMPLE IRA, schedule a call today.