April 7, 2022
SECURE 2.0 – Major Changes to Retirement Plans are on the Way
A major bill regarding retirement plan legislation passed the House of Representatives on Tuesday, March 29, 2022, by a vote of 414 to five. We are referring to this legislation as SECURE 2.0, considering it is an enhanced version of the provisions in the SECURE Act of 2019.
The actual Act is called Securing a Strong Retirement Act of 2022 (SSRA). See our legislative updates on the BEI website if you are not familiar with the SECURE Act.
The bill contains provisions aimed at expanding plan coverage by requiring automatic enrollment, allowing plans to make corrections for inadvertent errors, increasing the RMD age to seventy-five, allowing retroactive benefit increases, and increasing tax credits for startup plans. To offset various tax credits, the bill provides for catch-up contributions to go to ROTH accounts. The Bill now goes to the Senate where they have their own version of SECURE 2.0. We expect that most legislation now in the House bill will carry over and be part of the Senate bill.
Below are some of the provisions in this new bill:
Automatic Enrollment and Escalation
Beginning in 2024 new 401(k) and 403(b) plans will have to offer automatic contribution and escalation features. Existing plans will be grandfathered. The requirement would also apply to employers that first begin participating in a Multiple-Employer Plan (MEP) after enactment, even if the plan was established before enactment. Small employers with fewer than ten employees, new employers in business less than three years, and sponsors of governmental and church plans would be exempt from the requirement. Employees could opt out of automatic enrollment or choose a different contribution percentage.
Expanded Coverage for Part-time Workers
Under the SECURE Act of 2019 employers have to offer their 401k plan to employees who have completed at least five hundred hours of service in the previous three years. This new Act reduces three years to two years and this rule could affect plan eligibility as early as 2023.
Required Minimum Distribution Changes
A participant’s RMD start date would increase from the current age of seventy-two to age 73 in 2023, to age 74 in 2030 and to age 75 in 2033.
New Retirement Plan Start-up Tax Credits
Starting in 2023, the current retirement plan start-up tax credit for 50% of administrative costs would increase to 100% (capped at $5,000 per year) for employers with fifty or fewer employees. The credit for employees with 51–100 employees would remain at 50%. However, additional credits would be available to all employers with up to 100 employees that contribute to defined contribution plans on their employee’s behalf.
Small employers that join a Multiple Employer Plan (MEP) can claim the credit, regardless of how long the MEP has existed.
Expanded Self-Correction Program
The bill would significantly expand the Self-Correction Program (SCP) under IRS’s Employee Plans Compliance Resolution System (EPCRS) and add a new safe harbor correction for elective deferral failures, inadvertent errors, participant loan issues, reasonable errors in administrating automatic enrollment and automatic escalation.
Defined Contribution plans could offer annuity options with certain increasing or accelerated payment features. For example, you could guarantee increases of up to 5%, if applied at least annually. You can also have full or partial lump sum commutations and return of premium death payments without violating the RMD rules.
Reduced penalty tax. The excise tax for failure to take an RMD would decrease from 50% to 25% beginning in 2023. For RMDs from individual retirement accounts (IRAs), the excise tax would further drop to 10% if the failure is corrected before the end of the second tax year beginning after the end of tax year in which the penalty is imposed.
Student loan matching payments
The Act would let sponsors of 401(k), 403(b), governmental 457(b) and SIMPLE plans to match employee’s’ qualifying student loan payments as if the payments were salary-reduction contributions.
Reporting and Disclosure Requirements
- The bill would require defined contribution plans to deliver at least one, paper benefit statement per year (one every three years for defined benefit plans beginning in 2024), unless a participant affirmatively requests electronic delivery. In addition to summarizing the participant’s benefits, the paper statement would contain information on how participants can opt out of receiving the paper disclosure, or request delivery of some or all disclosures on paper for no additional cost.
- The three governmental agencies that are responsible for retirement plan compliance and enforcement—IRS, DOL, and the PBGC—would have to review how to consolidate and simplify their reporting and disclosure requirements.
- Starting in 2023, defined contribution plans would only have to provide an annual reminder notice to employees who chose not to participate and who have no account balance.
Retirement Savings Lost and Found
The bill would require Department of Labor (DOL) to establish within two years, an online searchable database of information for retirement benefits. Individuals who had been a retirement plan participant or beneficiary would be able to search the database to get contact information for the plan’s administrator.
Qualified Longevity Annuity Contracts
Qualified longevity annuity contracts (QLACs) let employees use a portion of their retirement savings to purchase an annuity starting as late as age 85 without violating the RMD rules. The bill directs the IRS to amend its QLAC regulations within a year of the bill’s enactment to not limit premiums to 25% of the account balance and allow for clarifying the rules for joint and survivor benefits for married participants who divorce after purchasing a QLAC before payment begin.
Catch-up Contribution Limits
Beginning in 2024, qualified and 403(b) plans could allow larger catch-up contributions of up to $10,000 for individuals, who will be at least age 62, but less than age 65 by the end of the tax year. The maximum catch-up contribution for SIMPLE plans would increase to $5,000.
Cash-out Limit Increased
If a plan participant has an account balance of $5000 or more, they cannot be forced out of the plan. This threshold is increasing to $7000 beginning in 2023.
Retroactive Benefit Increases
Retroactive amendments to increase benefits, except matching contributions for a plan year beginning in 2024 or later, could be made by the due date of the employer’s tax return for the tax year that includes the plan year. This would give existing plans the same flexibility to retroactively enhance benefits that the SECURE Act provided, by allowing employers to retroactively sponsor new plans.
Military Spouse Eligibility Credit
Small employers could receive a three-year tax credit if the following requirements are met:
1. Employers will make employees, who are military spouses, eligible for defined contribution plans participation within two months of hire.
2. Employers will let eligible military spouses receive any matching or nonelective contribution, they would otherwise have been eligible to receive, at two years of service.
3. Employers will immediately vest 100% of all employer contributions for military spouses. The credit would apply only to contributions for military spouses who are not highly compensated employees.
New ROTH Contribution Rules
Beginning in 2023, 401(k), 403(b), and governmental 457(b) plan participants aged 50 or older, can only make catch-up contributions as a Roth contribution on an after-tax basis.
Employers could permit employees to elect to have some of or all their matching contributions treated as Roth contributions, under 401(k), 403(b) or governmental 457(b) plans.
Employers could let employees elect Roth treatment of both employer and employee contributions to SIMPLE plans and SEPs.
In our experience, most retirement plan laws that Congress enact do not affect most plans. In this case, Congress has joined with the retirement community to identify areas that would improve retirement plan savings. Therefore, many of these new rules will affect most retirement plans. This law needs to be approved by the Senate and be signed by the President.
Benefit Equity Inc. will keep you updated on this new legislation and for more information, please reach out to your financial advisor or one of our BEI consultants at 714-480-1364.
Author: Robert Gorelick, APA, and Founder Benefit Equity Inc.