July 27, 2021
By
Brian A. Ritchie
Counsel to the Firm, Stoll Keenon Ogden PLLC
(859) 231-3648
brian.ritchie@skofirm.com
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted in December of 2019, bringing significant and long-anticipated changes to the retirement planning landscape. Now, new legislation, formally titled the “Securing a Strong Retirement Act,” is pending in Congress, which if passed would bring more changes and build on many of the reforms established by the SECURE Act. This new legislation enjoys bipartisan support in both the House and Senate and is being commonly referred to as “SECURE Act 2.0.”
Some of the major highlights of the proposed legislation are as follows:
Postponement of Required Minimum Distributions. Prior to the SECURE Act, retirement plan participants were generally required to begin taking minimum distributions from their plan account at the later of age 70½ or their retirement. The SECURE Act changed this age to 72. SECURE Act 2.0 would further postpone the required beginning date for required distributions to age 73, effective January 1, 2022. It would also incrementally increase the required age over the next decade – to age 74 on January 1, 2029 and to age 75 on January 1, 2032.
Mandatory Auto Enrollment for New Plans. Many plans today utilize automatic contribution arrangements – where new hires are automatically enrolled in the employer’s retirement plan at a fixed contribution rate, unless the employee affirmatively changes the contribution rate or opts-out of the plan altogether. SECURE Act 2.0 would require that all new 401(k) and 403(b) plans established after the date of enactment include an automatic contribution feature, with a required contribution between 3% and 10% of annual compensation in the first year of participation. Subsequent annual increases of 1% are also required, up to an eventual overall minimum of 10% and maximum of 15%. The proposed legislation provides certain exceptions for new and small (less than 10 employees) businesses.
Changes to Catch-Up Contributions. Under current law, employees over age 50 may make additional (or “catch-up”) deferral contributions over and above the normal IRS contribution limits. In 2021 for example, employees over the age of 50 can contribute an additional $6,500 to an employer plan, either on a pre-tax basis or as an after-tax Roth contribution. SECURE Act 2.0 would make two significant changes with respect to catch-up contributions:
- Effective January 1, 2022, all catch-up contributions would be required to be treated as Roth contributions (pre-tax catch-up contributions would no longer be permitted); and
- Beginning in 2023, the limit on catch-up contributions to a 401(k) plan will be increased to $10,000 for individuals who are age 62, 63, or 64.
Optional Treatment of Employer Matching Contributions as Roth Contributions. Under current law, employer matching contributions are permitted only on a pre-tax basis. SECURE Act 2.0 would allow plans to provide participants with the option to receive matching contributions on a Roth basis rather than a pre-tax basis.
Changes to Tax Credit for Plan Start-Up Costs. The SECURE Act expanded an existing tax credit for small employers associated with the administrative costs related to establishing a retirement plan. SECURE Act 2.0 would further expand this credit, increasing the amount of the credit from 50% to 100% of administrative costs. The legislation would also add a tax credit for an employer’s contributions to a new plan in the first few years of the plan’s existence.
Service Requirement for Long-Term Part-Time Employees. The SECURE Act instituted a new requirement that employees who work at least 500 hours for three consecutive years of service must become eligible to make salary deferral contributions to a 401(k) plan. SECURE Act 2.0 would reduce this service requirement to two (2) consecutive years with at least 500 hours of service. It also clarifies that service prior to 2021 will be disregarded for vesting purposes as well as eligibility purposes.
SECURE Act 2.0 would also make a number of other significant changes, including:
- Allowing employers to provide de minimis financial incentives to employees to encourage plan participation.
- Permitting plans to treat student loan payments as elective deferrals for purposes of matching contributions.
- Allowing Roth contributions to SIMPLE IRAs.
- Permitting employers to rely on a participant’s self-certification that they have experienced a hardship event for purposes of hardship distributions from a plan.
- Expansion of the IRA charitable distribution provision to allow for a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.
- The creation of a national online “lost and found” for retirement plans to help connect former employees and plans in which they may have a benefit.
- A reduction in the notices which plans are required to provide employees who are eligible for, but not enrolled in, a plan.
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