SECURE Act 2.0: Will Real Retirement Plan Reform Happen in 2022?
SECURE Act 2.0: Will Real Retirement Plan Reform Happen in 2022?
David Schmid, Vice President - 401(k) Plan Advisor
In December 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. The law, among other things, made multi-employer plans available to employers, increased tax credits to incentivize small businesses to start new retirement plans, included plan coverage for part-time employees and delayed required distributions from 70 ½ years of age to 72.
Two and a half years after passing the SECURE act, the House passed SECURE Act 2.0 earlier this year with bipartisan approval. The Senate has recently put together their own similar version . It is anticipated that the similarities will allow both houses to reconcile their differences.
With Social Security providing less and less of a benefit for each following generation, the government has realized that they must improve retirement plans to bolster savings. Therefore, many of the retirement plan changes are geared towards encouraging savings and expanding access. Other changes improve on current law and focus on making plans more efficient.
If any of the current versions of the Secure Act 2.0 become law, here is a
Quick Rundown of the Potential Changes with a Focus on 401(K) Plans:
As CNBC stated last week: “It’s uncertain whether either of two Senate proposals will make it into a final version of the so-called SECURE Act 2.0.”
Please note: This is not a complete list and that this rundown only references the proposals.
Automatic Features:
The House bill would require that all new 401(k) plans to have automatic enrollment and auto escalation features. A different bill would require auto-re-enrollment every three years
Automatic enrollment allows a company (plan sponsor) to automatically deduct a set deferral amount from an employee’s paycheck and into a default investment unless they opt-out of the plan or want to contribute at a different rate or choose their own investments. The passing of the Secure Act 2.0 would require employers implementing new 401(k) plans to automatically enroll participants at a pretax contribution rate of 3%.
Automatic escalation increases the employee’s contribution by a set amount annually. The passing of the Secure Act 2.0 would require a mandatory increase of 1% up to a level of 10% for non-safe harbor plans and 15% for safe harbor plans. Participants may opt out of the increase.
Automatic escalation increases the employee’s contribution by a set amount annually. The passing of the Secure Act 2.0 would require a mandatory increase of 1% up to a level of 10% for non-safe harbor plans and 15% for safe harbor plans. Participants may opt out of the increase.
Tax Credits for Employers Starting New Defined Contribution Plans:
Small employers with fewer than 100 employees are currently eligible for a three-year start-up credit that is up to 50% of administrative costs, up to a maximum yearly cap of $5,000. SECURE Act 2.0 provides for an additional credit for 5 years of up to $1,000 per employee). This credit applies to employers with up to 50 employees and is phased out for employers with between 51 and 100 employees.
Other Secure Act 2.0 Savings Provisions:
- Allow for a new automatic enrollment safe-harbor plan with higher contribution percentages that avoids some non-discrimination testing rules.
- Allow for matching contributions based on student loan repayments. For example, if an employee puts $100 towards their student loan, the company will match it with a $100 employer contribution to the retirement plan.
- Allow for employers to set aside small amounts of money in an emergency savings account for employees.
- One proposal allows companies to auto enroll participants in emergency savings accounts at 3% of pay. Employees could access these accounts at least once a month. Participants could save up to $2,500.
- Another proposal would let workers withdraw $1,000 for their 401(k) without the current 10% early withdrawal tax penalty
- Permit older participants above the age of 62-64 to have increased catch-up contributions ($10,000 vs. the current $6,500).
- In 2023, the Secure act 2.0 would require all catch up contributions to be in Roth accounts.
- Permit other contributions to be Roth contributions, including employer matches and employer non-elective contributions.
- Increases required minimum distribution age to 73 beginning in 2023, 74 beginning in 2030, and 75 beginning in 2033.
- Revised definition of long-term and part-time employees
- Currently, long-term is defined as participants with five hundred hours each of the last three years. The new proposal changes that to two years.
- Currently, long-term is defined as participants with five hundred hours each of the last three years. The new proposal changes that to two years.
If any of the current versions of the Secure Act 2.0 become law, here are a
Few Highlights for Small Businesses to Think About:
Tax Credits for New Plans
If you have been thinking about starting a 401(k) plan, this would be a great time, as the government is currently providing an incentive through generous tax benefits. However, Secure Act 2.0 could increase those credits by $2,000 for an additional two years.
We recommend checking with your accountant regarding the amount of the tax credits and if the timing would allow you to benefit from waiting on SECURE ACT 2.0 to be passed to receive additional credits.
Automatic Features for New Plans
Should automatic enrollment and escalation be mandatory for new plans, a prospective plan sponsor should expect that existing record-keeping service proposals may need to be re-worked as many record-keepers charge on a per employee basis.
According to Vanguard’s “How America Saves 2022: Insights to Action” Study: “Plans that used automatic enrollment had a 93% participation rate in 2021, compared with 66% for plans with voluntary enrollment.”In addition, “Vanguard analysis suggests automatic enrollment's default effect is strongest in influencing participation rates, with 9 in 10 automatically enrolled new hires remaining in their employer's plan after three years.”
Small businesses may also want to re-evaluate their payroll relationship as improved payroll integration with 401(k) contributions will provide increased efficiency and fewer problems.
Assuming that mandatory automatic enrollment and escalation are enacted, it becomes more likely a future bill (Secure Act 3.0?) makes auto-enrollment/escalation mandatory for all plans and not just new plans. This would increase costs at all businesses as everyone would be enrolled (record-keeping providers often charge a per employee fee) and total matching costs would increase for those companies that provide a match.
Although costs are always considered in bringing on a new plan or evaluating an existing plan, auto features have been proven to increase participation, increase deferral rates, increase the use of professionally managed accounts (target dates, risk models, managed accounts, etc.) and, therefore, have improved participant outcomes.
Overall, SECURE Act 2.0 should offer comprehensive solutions that help address the student loan problem, improve retirement outcomes and offer additional incentives for companies to offer retirement plans. Like the SECURE Act 1.0, version 2.0 seeks to address retirement deficiencies.
Unfortunately, according to a 2022 AARP Public Policy Institute study, 57 million American workers still do not have access to a company sponsored retirement plan and many just cannot afford to put enough away.
David SchmidVice President
401(k) Plan Advisor
DISCLAIMER: This newsletter is intended to provide thought-provoking commentary. The information presented herein has been obtained from and is based upon sources and vendors deemed to be reliable, but may be incomplete. Parkside Financial Bank