SECURE Act 2.0: Ready for Changes to the SECURE Act?

by Prof. Robert Bloink and Prof. William H. Byrnes

The House has now passed a new retirement bill, dubbed the “SECURE Act 2.0”, to replace the Build Back Better Act and build off the momentum of the original SECURE Act. While the Senate has yet to release its own version, it is expected to take action later this spring. Because many provisions contained in the current legislation has broad bipartisan support, many experts believe that we will see a new law that will make significant changes to the retirement arena sometime this year. For now, clients should be advised about the provisions that made it into the House version of SECURE Act 2.0 to get a sense of what might be coming later in the year, after the Senate considers the issues. Read on for a summary of some of the most likely changes we can expect.

Retirement Plan Contributions & Distribution Changes

The SECURE Act 2.0 would make changes to both the retirement plan contribution and distribution rules. Currently, the required beginning date for traditional account distributions is age 72. Over a ten-year period, the required minimum distribution age would gradually be increased until it reaches age 75 in the year 2031.

Under the House version, if the plan participant attains age 72 after December 31, 2022, and age 73 before January 1, 2030, the RMD age increases to 73. If the participant reaches age 73 after December 31, 2028, and age 74 before January 1, 2032, the RMD age increases to 74. If the participant reaches age 74 after December 31, 2031, the RMD age increases to 75.

The House version would also allow older plan participants to make larger “catch-up” contributions. For years beginning after 2023, the catch-up contribution limit would increase from $6,500 to $10,000 for 401(k) plan participants who have reached age 62, 63 or 64 by the end of the plan year. For participants between ages 50 and 62, the current catch-up limit would remain in place. However, the House bill would require that all catch-up contributions be made to Roth accounts (so they will be taxed immediately).

The legislation would also index the current $1,000 catch-up contribution for IRAs to inflation beginning in 2023. The catch-up contribution limit for SIMPLE IRAs would be increased from $3,000 to $5,000 (the limit would also be indexed to inflation).

Starting in 2023, employers would be able to give employees the option of having their employer match treated as a Roth contribution (which are currently taxable and withdrawn tax-free in the future). Under current law, employer matching contributions can only be made with pre-tax dollars to traditional retirement plans.

The law would also allow employers to base matching contributions on an employee’s student loan payments, rather than the employee’s retirement contributions. That provision is expected to help many plan sponsors satisfy antidiscrimination features by increasing contributions for non-highly compensated employees.

Expanded Auto-Enrollment Features

The House bill would require employers who establish retirement plans to automatically enroll employees when they become eligible to participate in the plan, at a deferral rate equal to 3% of the employee’s pay (the employee would have an opt-out option). Each year, the deferral rate would increase by 1% up to at least 10% of the employee’s pay, but not more than 15%.

Current plans would be grandfathered, so the new rule would only apply to newly established plans. The law also creates an exception for small business owners with ten or fewer employees, church plans and employers that have been in business for less than three years.

Expanded Eligibility for Part-Time Employees

Under the original SECURE Act, employees who perform at least 500 hours of service for at least three consecutive years (and are at least 21 years old) must be allowed to participate in employer-sponsored 401(k)s. The House version of SECURE Act 2.0 would shorten the three-year period to two years in order to expand access for part-time workers. That means the first group of long-term part-time workers would become eligible to participate as of January 1, 2023.

Conclusion

The law is designed to both expand access to retirement plans and help older workers continue to save for a longer amount of time. Because the exact parameters of the legislation remain subject to change as negotiations progress, both advisors and clients should pay close attention to the details.