Spring 2022 Fiduciary Commentary
On March 29, 2022, the House of Representatives passed the retirement savings legislation, Securing a Strong Retirement Act (also referred to as the SECURE Act 2.0) in an overwhelming 414-5 vote. This law would expand on the original SECURE Act legislation passed in late 2019, which expanded opportunities for savers and addressed many long-overdue updates to private retirement plan system.
The SECURE Act 2.0 bill would expand and enhance many of the initiatives of the 2019 law. Here is a summary of the 401(k) provisions proposed in the new legislation.
- Automatic enrollment mandate – New 401(k) plans would be required to automatically enroll eligible employees at 3%, increasing by 1% annually (to no more than 15%) until at least a 10% contribution rate is met. Plans in existence prior to the passage of the SECURE Act 2.0 and organizations with ten or fewer employees would be exempt from this rule.
- Roth option for matching contributions – The SECURE Act 2.0 would allow employers to give their plan participants the option to have matching contributions made as either Roth or pre-tax contributions.
- Match on student loan repayments – The proposal would provide an option to direct match contributions to repay a participant’s student loan balance.
- Catch-up contributions – Catch-up contribution limits would be increased to $10,000 (indexed for inflation) for participants aged 62 and older beginning in 2024. Additionally, all catch-up savings would have to be made as Roth contributions beginning in 2023.
- Small business tax credits – The legislation would enhance the tax credits available to small businesses with fewer than 100 employees:
- Startup costs – The tax credit would increase from 50% to 100% (to up to $5,000 per year) of plan administrative costs for three years for small businesses with up to 50 employees.
- Employer contributions – For small businesses, the tax credit for employer contributions would increase to up to $1,000 per employee.
- Long-term/part-time workers – Under the original SECURE Act, a plan must allow part-time employees to participate who work at least 500 hours each year for three consecutive years. The SECURE Act 2.0 would change the eligibility requirement to 500 hours per year for two consecutive years.
- Required minimum distributions (RMDs) – The original SECURE Act raised the RMD age from 70-1/2 to 72. The SECURE Act 2.0 would further raise the RMD age to 73 in 2023, 74 in 2030, and 75 in 2033.
Quirk of the Proposed RMD Rules
An unanticipated twist of the new legislation is the treatment of some beneficiary distributions from retirement accounts. The 10-year rule under the original SECURE Act established a 10-year time frame for the full distribution of inherited IRAs for most non-spouse beneficiaries.
Prior to the original SECURE Act, beneficiaries were permitted to withdrawal retirement assets over their life expectancy (stretch payments). As of January 1, 2020, the SECURE Act required most non-spouse beneficiaries to withdraw all assets from inherited retirement accounts by the end of the ten years following the death of the account owner. Spousal, minor children, and disabled or chronically ill beneficiaries are exempt from the 10-year rule.
This change, albeit not as desirable for many beneficiaries, represented a very simplified distribution policy that did not require dissecting the maze of RMD regulations to determine such as which rule applied based on the age of the decedent or to calculate annual RMDs.
An unanticipated component of the new IRS RMD regulations is the interpretation of the 10-year rule. The new regulation’s interpretation would bring back the life expectancy calculation rules and their complexities to the 10-year rule. The SECURE Act 2.0 would require RMDs in years one through nine to be based on the RMD rules that were in place before the first SECURE Act, and then require the account to be fully dissolved by the end of the 10-year term.
From a participant’s perspective, many of these plan changes affect long-term financial and tax planning strategies. It will be important for savers to consider how these proposals may impact their overall financial and estate plans.
The SECURE Act 2.0 is a continuation of the efforts made in the 2019 legislation to make saving for retirement easier for Americans. There appears to be a significant appetite on Capitol Hill to push the legislation through to pass a retirement savings bill this year. The provisions of the SECURE Act 2.0 discussed are still preliminary. A comprehensive agreement between the various Congressional committees is not expected to be ready to be included in a larger bill until the end of the year.