The SECURE Act (Setting Every Community Up for Retirement Enhancement), passed in late 2019, included the most updates to retirement legislation in over a decade. The legislation’s goal was to encourage more Americans to improve their retirement savings. As we noted at that time, the provisions of the SECURE Act included:
- Enabled working individuals can contribute to traditional IRAs beyond age 70 ½
- Allowed Required Minimum Distributions (RMDs) to begin later, when a retiree turns 72
- Increased tax credit for small employer plans with auto-enrollment
- Allowed penalty-free withdrawals for birth or adoption costs
- Created opportunities for part-time workers to participate in defined benefit plans
- Extended use of 529 Plan funds, including to repay student loans
SECURE Act 2.0
Now enter SECURE Act 2.0, which was introduced in November 2020. In May 2021, the House Ways and Means Committee voted unanimously to send the new bill to the full House for consideration. The goal is unchanged from the original SECURE Act and the bill appears to have bipartisan support. Some of the highlights of the new legislation include:
- Mandatory automatic enrollment. Defined contribution plans after 2021 would automatically enroll new employees, when eligible, into the plan at a pre-tax contribution level of 3% of an employee’s pay. Barnes Dennig performs a significant number of plan audits and has noticed a trend of more employers choosing the auto-enrollment feature. However, if the law passes, the auto-enrollment practice will be mandatory. New employees will be able to opt-out of the plan if they choose. There is substantial evidence that auto-enrollment increases employee participation in retirement plans, which is one of the major objectives of the proposed legislation.
- Auto escalation. The auto-enrollment of three percent would increase annually by 1%, up to at least 10% but not more than 15%, of the employee’s pay. Employees could opt to contribute a different amount.
- Higher Catch-Up Contributions. Under current law, employees aged 50 and older can make an annual catch-up contribution of $6,500 to their 401(k) plan. SECURE Act 2.0 would increase this amount to $10,000 for those aged 62 through 64 beginning in 2023. Interestingly, the new Act will require that all catch-up contributions be subject to Roth tax treatment. Currently, catch-up contributions can be on a Roth or a pre-tax basis. Learn more about Roth IRAs and how they differ from traditional IRAs in this blog post.
- Delay RMDs. Required Minimum Distributions (RMDs) were delayed to age 72 in the original Act. SECURE Act 2.0 proposes increasing this to age 73 starting in 2022, to age 74 starting in 2029, and to age 75 starting in 2032.
- Improvements to 403(b) plans. The proposed Act will update the hardship withdrawal rules for 403(b) plans to be similar to those for 401(k) plans.
If you have questions or need assistance with the structure of your 401(k) plan or would like additional information about the provisions proposed in SECURE Act 2.0, contact us. We’re here to help.