If passed, SECURE Act 2.0 would automatically enroll some workers in retirement plans and raise the mandatory age for RMDs.
Ubiquity breaks down the proposed legislation and some of its implications.
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The Setting Every Community Up for Retirement Enhancement Act 2.0, nicknamed SECURE Act 2.0, takes aim at addressing the impending retirement savings crisis.
Roughly half of Americans have no savings set aside for their golden years. The new bill encourages greater savings, while lowering administrative costs for employers.
Employers adopting new SIMPLE, 403(b), or 401(k) plans would be required to include an auto-enrollment feature that sets participants up to contribute 3-10% of their total compensation toward retirement each year. These contributions would automatically increase by 1% per year, to a maximum of 15%. Employees still retain the right to opt out if they desire, though very few workers actually do. Existing plans would be grandfathered, meaning nothing has to change at the moment.
The original SECURE Act required that long-term, part-time workers become eligible for retirement plan participation if they have worked 500+ hours per year over the last three plan years, starting in 2021. SECURE Act 2.0 goes one step further, shortening the period from three to two years.
Presently, Americans age 72+ have to begin taking distributions from their retirement plans. This age increased from 70.5 with SECURE Act 1.0, starting in 2020. Yet, over a quarter of seniors ages 65-74 are still participating in the workforce, as well as 6.6% of those over 75. Under SECURE Act 2.0, Americans could delay taking distributions until age 73 beginning January 1, 2022, age 74 beginning January 1, 2029, and age 75 beginning January 1, 2032. Participants with account balances under $100,000 would not have to take distributions at all. Since the typical head of household above age 75 has less than $85,000, this one rule could do away with RMDs for most Americans, which could effectively create more inter-generational wealth passed down through estates.
Many people want to contribute more as retirement draws near. Participants in 401(k) and 403(b) plans are able to make additional “catch-up contributions” of $6,500, starting at age 50. This helps late starters save quicker, above and beyond the annual limit. Plan participants would be able to increase catch-up contributions from the current $6,500 to $10,000 per year for those ages 62, 63, and 64. At 65, the $6,500 allowance returns. These figures may be adjusted for cost-of-living increases.
Effective January 1, 2022, all catch-up contributions would be Roth only – meaning that plan participants pay taxes on them now, but pay no taxes at withdrawal time.
Effective immediately upon adoption, plan sponsors could offer employees the option to put their matching contributions into Roth accounts.
Student loan borrowers often find it difficult to save for retirement when saddled with college debt. SECURE 2.0 would allow plans to treat student loan contributions as elective deferrals, eligible for the employer match. Employers would be able to match student loan payments up to a certain percentage of an employee’s salary, depositing the money into the employee’s retirement savings account, even if the employee made no other contributions. The code also contains changes to nondiscrimination testing that would ease the implementation of this benefit.
While SECURE 1.0 made it easier for small business employers offering 401(k)s to band together in a single plan, SECURE 2.0 would make 403(b) plans eligible to participate in Multiple Employer Plans. Professional service providers take over the administrative burden, rather than individual employers.
The Retirement Savings Contributions Credit (Saver’s Credit) gives low and middle-income individuals a tax credit worth up to $1,000 for making eligible contributions to an employer-sponsored retirement plan or IRA. SECURE 2.0 would raise the rate of the credit to 50% of what is contributed, regardless of income level, and increase the maximum credit to $1,500.
Certain plan objectives are aimed at simplifying administration to reduce total plan costs. Certain disclosure requirements are eased under the new proposal. Excise taxes for failure to make Required Minimum Distributions will reduce from 50% to 25%. The IRS Employee Plans Compliance Resolution System would expand, and the requirements for recouping accidental overpayments would be modified.
A tax credit worth 100% of the employer’s administrative expenses (to a maximum of $5,000) for the first three years is available for small business retirement plans with 50 or fewer participants. This is changed from the previous tax credit of 50% of the administrative costs (also capped at $5,000).
A brand-new tax credit for enterprises with 50 or fewer workers allows them to receive up to 100% of the amount they contribute on each employee’s behalf – capped at $1,000 per person. Businesses with 51-100 employees would receive a tax credit worth 100% of their contributions per employee in the first and second years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year.
The $500/year auto-enrollment tax credit would still apply for the first three years of a new plan as well.
Employers will have more time to adopt retirement plan amendments – which can now be made as late as the due date of the employer’s annual tax return. Generally, this date would be December 31, 2022 – a deadline consistent with the new plan adoption deadline provided for in the SECURE Act. However, with extensions, employers can decide up until March or even April 15, 2023.
Within three years of enactment, the Labor, Treasury, and Commerce departments will coordinate a searchable database for lost participant benefits. This publicly searchable “repository of last resort” for lost, uncashed retirement distribution checks could be a way for people to locate missing money they’d lost or forgotten about when changing jobs.
SECURE 2.0 would also increase the cap on mandatory distributions from $5,000 to $6,000. Under current rules, beneficiaries with accounts worth over $5,000 must consent to a distribution – either through a direct rollover to another account or a cash check. If the value is worth more than $1,000 and consent is not given, the benefit must be transferred to an IRA or other investment vehicle as designated by the plan administrator. With SECURE 2.0, these smaller balances can be transferred to the Office of the Retirement Savings Lost and Found in the event a non-responsive participant cannot be reached to accept the distribution.
Ubiquity can help you take advantage of SECURE Act 2.0 provisions to get the most out of your small business 401(k). Start your easy, low-cost retirement savings plan today and keep what’s yours with a flat, affordable monthly fee
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