COVID-19 has had a monumental impact on the economic landscape in 2020, and the repercussions will be felt long after the year is over. While economic studies of retirement contributions for 2020 have found that most participants stayed the course during the pandemic and continued regular retirement contributions, the overwhelming majority of studies within the retirement plan community conclude workers largely lack sufficient funds for retirement.
In response to this, on October 27, 2020, Ways and Means Committee Chairman Richard Neal (D-MA) and Ranking Member Kevin Brady (R-TX) introduced “The Securing a Strong Retirement Act of 2020” bill, expanding upon the SECURE Act of 2019 and aiming to incentivize Americans to save for retirement. The proposed legislation contains more than 30 changes to retirement plans – here’s the breakdown of some of the more significant ones:
Expanding Automatic Enrollment in Retirement Plans
Automatic enrollment, a feature found in some retirement plans that automatically enrolls eligible employees into the retirement plan unless they opt out, significantly increases participation in retirement plans. Not only does this increase participation within younger, lower-paid employees, but it also helps eliminate the racial gap in participation rates, according to an Ariel Aon-Hewitt Study. The proposed legislation would require new 401(k), 403(b), and SIMPLE plans to automatically enroll participants in the plan as they become eligible (all current 401(k), 403(b), and SIMPLE plans are legacied in). The proposed automatic enrollment amount is at least 3% but no more than 10% and would contain escalation features whereby the deferral percentage would increase 1% each year until it reaches 10%.
Potential Administrative Compliance Issues
Automatic enrollment features can provide administrative compliance issues for plan sponsors. The proposed legislation acknowledges this and provides plan sponsors a grace period to correct any errors found within administering automatic enrollment and automatic escalation features. This grace period would extend the corrections to 9 ½ months after the end of the plan year in which the mistakes are made and would be penalty-free.
Changes Aimed at Younger or Lower-Income Individuals
- Saver’s Credit: The Saver’s Credit offers an incentive to save for retirement to low and middle-income individuals. The credit is currently capped at $1,000 and is completely phased out once a single filer reaches $32,500 of adjusted gross income ($65,000 for households filing as married filing jointly). The proposed legislation creates a single credit rate of 50%, increases this credit to $1,500, and increases the maximum income eligibility amount. Finally, the credit would be indexed to inflation.
- Student Loan Payments: The proposed legislation would allow plan sponsors to make matching contributions under a 401(k), 403(b), or SIMPLE IRA plan with respect to student loan repayments. Many potential participants within retirement plans cite student loan debt as a burden that deters them from participating. This legislation would allow participation from those individuals by receiving matching contributions related to the student loan payments made.
- Long-term, Part-time workers: The SECURE Act expanded participation within retirement plans by requiring employers maintaining a 401(k) Plan to have a dual eligibility requirement whereby an individual must complete one year of service (defined as 1,000 hours of service) or three consecutive years of service where the employee completes at least 500 hours of service. The proposed legislation would reduce the three-year requirement to two years.
Changes Aimed at Older Individuals
- Catch-up Contribution Limits: Current law allows employees who have attained age 50 to make catch-up contributions in excess of the applicable limits. The limit on those contributions for 2020 is $6,500. The proposed legislation would increase this limit to $10,000 for those individuals who have attained the age 60.
- Increase in Age for Mandatory Distributions: In an effort to ensure that participants do not use their retirement savings for estate planning purposes and instead use their savings during their lifetime, current law requires plan participants to begin taking distributions from their retirement plans at age 72. The proposed legislation would increase this minimum distribution age to 75.
The Securing a Strong Retirement Act of 2020 proposes sweeping changes to the retirement plan community. These proposed changes, as well as the changes in the SECURE Act of 2019, can make compliance an ever-increasing challenge. To successfully navigate the way forward and ensure compliance, connect with the professionals at Barnes Dennig. We’re here to help.