Dylan Telerski / 31 Aug 2021 / Business
Big changes are potentially afoot for retirement plans across America.
The proposed Securing a Strong Retirement Act of 2021, or SECURE Act 2.0, unanimously passed in the House Ways and Means Committee on May 5th, 2021. Next, House members will vote and send the bill onto the Senate, likely after its August recess. The Senate has its own provisions that will need reconciling before President Biden signs the final draft into law. Typically, retirement measures piggyback onto larger tax reform, budget, or end-of-year spending bills. Given the wide bipartisan support for a retirement plan bill, it’s likely some version of SECURE Act 2021 will pass this year.
What’s In SECURE Act 2.0?
Among the most impactful changes:
Employers starting new plans would be required to auto-enroll eligible workers at a savings rate of 3% of their salary, which would increase by 1% annually until their rate reached 10%. Employees would have the ability to opt-out or save even more if they desired. Old plans would be grandfathered in, and a small business 401(k) with fewer than 10 participants or startups with less than three years in business would be exempt.
Increased or Negated Required Minimum Distributions
SECURE 2.0 would increase the RMD age from 72 to 73 in 2022, 74 in 2029, and 75 in 2032. Those with plans worth less than $100,000 would not be required to take out any RMD.
Increased Catchup Contributions
Americans over 50 years of age with a 401(k) or 403(b) can set aside an additional $6,500 above the annual limit as a “catchup contribution.” Those with an IRA can contribute $1,000 more. SECURE Act 2.0 would allow 401(k) and 403(b) participants to add an additional $10,000 per year at 62, 63, and 64.
Student Loan Matches
For the first time, employers can count the amount of money used to pay off a student loan as a “retirement savings contribution,” eligible for the company match.
Under existing law, SEP and SIMPLE plan participants cannot have a designated Roth IRA account. However, SECURE Act 2.0 allows the opportunity to make after-tax Roth contributions within the plan. All catch-up contributions would also go into a Roth account, and employers may opt to put their matching contributions into Roth, rather than pre-tax, accounts.
You can read about more of the proposed changes in greater detail on our SECURE Act 2.0 page.
How Do the House and Senate Versions Differ?
The Senate’s version of SECURE Act 2.0, titled the Retirement Security and Savings Act of 2021, contains many of the same proposals as the House bill, with a few noteworthy differences:
- The taxpayer Saver’s Credit will be fully refundable if paid to a Roth account.
- Spouse beneficiaries can treat inherited account balances as their own.
- Non-spouse beneficiaries can make an indirect rollover to an inherited IRA.
- Employer plans will be permitted to accept Roth IRA rollovers.
- Catchup contribution increases apply to all participants over 60 years of age (rather than just 62-64).
- The Required Minimum Distribution requirement would be eliminated for those with less than $100,000.
- A new tax credit for employers offering auto-enroll Safe Harbor 401(k)s with a 6% default deferral rate.
Critics Suggest Future Improvements to SECURE Act 2021
While these changes have met with broad support to expand access to retirement savings, this is unlikely to be the end of the discussion. Critics say there are a few key places where SECURE Act 2.0 comes up short.
- Only half of small businesses offer retirement plans, which puts financial security out of reach for much of the workforce.
- The bill doesn’t address job-hoppers who may experience long gaps of unemployment where they are unable to save anything for retirement.
- Young workers who change jobs often cash out their retirements, pay the 10% penalty, and lose out on years of gains and compounding returns.
Universal coverage – much like the auto-IRA plans we’re seeing in New York and California – is considered by some to be a more comprehensive bridge to greater savings that can be implemented on a national level.
Ubiquity Advises Small Businesses on 401(k) Options Under Proposed SECURE Act 2.0 Bill
Questions about which small business retirement plans might be right for you? Rely on Ubiquity to help you customize a simple, low-cost 401(k) solution that perfectly fits your business’ needs. Try our free SECURE Act tax credit calculator to see how much you could save at tax time by launching a new 401(k) program in the coming year. Contact us to schedule a free consultation with a retirement specialist and explore your plan options.