In December of 2019, The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed into law, with the goal of strengthening retirement security for more Americans by increasing access to tax-advantaged strategies so that citizens could boost their savings and avoid outliving their assets. In late March 2022, Congress passed another round of significant retirement-focused provisions with bipartisan support known as “SECURE Act 2.0”. If passed by the Senate, this bill will further expand and improve opportunities for Americans to become more retirement ready.
SECURE Act 2.0 contains numerous provisions, but our Retirement Plan Solutions team at BerganKDV has broken down a few key changes that employees and employers should be aware of if the bill does become law. Here are a few of the bill highlights:
- Mandatory Auto Enrollment/ Escalation. Under SECURE Act 2.0, employers would need to offer contribution plans that automatically enroll eligible new hires at an initial pretax contribution level of at least 3%, up to 10% of pay. If an initial rate of less than 10% is elected, the contribution rate will need to increase annually by 1% each year until 10% of pay is reached. Employees would have the opportunity to elect different contribution levels on an individual basis. These changes would apply to new 401(k) and 403(b) plans created after the bill pass date and all current plans would be grandfathered into the existing plan design. There are exemptions to the requirements for church and governmental plans, businesses with less than 10 team members, and businesses that have been established for less than three years.
- Student Loan Contribution Matching. SECURE Act 2.0 would authorize the ability for employers to make 401(k) matching contributions to the plan based on an employee’s student loan payments, without requiring impacted employees to defer into the plan. The matching contributions for student loan payments would be subject to the same vesting schedule as other matching contributions of the employer. This provision is a wonderful opportunity for employers to ensure that their plan is not just benefiting those with higher earnings and will help younger demographics avoid the detrimental financial choice of paying past debts at the expense of lost employer matching opportunities.
- Increase Catch-Up Contributions. The new bill increases the annual catch-up amount to $10,000 for plan participants ages 62-64 starting in 2024 and the limit would adjust for inflation. SECURE Act 2.0 does not change the existing catch-up contribution limit available to those age 50 or older. Currently, the 2022 limit on catch-up contributions for employees age 50 or older is an additional $6,500, for a total 2022 contribution limit of $27,000, indexed annually for inflation. This rate increase would benefit older workers and allow them to make larger contributions than before at a critical pre-retirement stage.
- Launch a Retirement Savings Lost and Found. SECURE Act 2.0 would establish a database within the Department of Labor where employees and retirees can locate previous plans from former employers more easily.
- Small Business Tax Credit. The new bill also creates a tax credit that encourages small businesses to offer a retirement savings plan (continuation of the first SECURE Act). There is a new credit that encourages small employers to make direct contributions to their 401(k) plan for their employees, offsetting up to $1,000 of these employer contributions for each participating employee. This is a fantastic opportunity for small businesses to promote the importance of retirement savings while helping their bottom line. Additionally, there is a tax credit that will help cover 100% of the costs for small employers to implement a startup 401(k) Plan for the first three years of the plan.
- Require Minimum Distribution (RMD) Age change from 72 to 75. The new bill changes the RMD age from 72 to 75 by the year 2032, and individuals with an account balance of $100,000 or less in aggregate retirement savings would have RMDs waived completely. The Age increase is subject to change, but currently will be the following: 73 in the year 2023, 74 in 2030 and 75 in 2032. Additionally, the legislative change would reduce penalties for failing to take an RMD from 50% down to 25%.
SECURE Act 2.0 recognizes the reality that many Americans are not saving enough for retirement. On average, most Americans are saving around 8.5% of their income toward retirement when it should be around 10-15%. The new bill takes a parental approach in ensuring that employees have the chance to contribute a suitable amount for their future and encourages employers to make it as simple as possible to do just that. It is key to note that SECURE Act 2.0 has not been officially passed by the Senate yet and that some of these provisions may be subject to change. If it does pass, it is recommended that you reach out to your trusted advisor if they have not reached out to you already to discuss how SECURE Act 2.0 may impact your retirement savings and tax planning strategies.
At BerganKDV, we help plan sponsors stay aware of potential legislation and how to navigate when new legislation takes effect. It is our goal to ensure plan sponsors and their employees are set for success in staying compliant with new legislation and in adopting advantageous provisions. If you have additional questions about the provisions included in SECURE Act 2.0, we would be happy to help. Contact us today and one of our team members will assist you.
