With Americans living longer and retiring later, saving for retirement has become more important than ever. Yet, too many employees are still not covered by employer plans, and most of those who are covered don’t contribute enough for a stable retirement.
To help workers save more, Congress enacted the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act in January 2020. This legislation put in place important steps to close the gap between the income needed for retirement and the benefits employees earn under their employers’ plans. 401(k) and 403(b) plans are the only employer-provided retirement benefits available to many employees who participate in employer plans, and the SECURE Act included many provisions encouraging adoption of new plans and retirement income accumulation.
Now, Representatives Richard Neal and Kevin Brady have introduced the Securing a Strong Retirement Act of 2020, (SECURE Act 2.0) that would further encourage plan adoption and retirement savings. Here is a summary of the changes that would take place if SECURE Act 2.0 becomes law.
01 Most New Plans Would Be Required to Have Automatic Enrollment
Surveys confirm that automatic enrollment increases retirement savings. SECURE Act 2.0 would require most new 401(k) and 403(b) annuity plans to have automatic enrollment provisions requiring contributions of 3% to 10% of pay. Small businesses with 10 or fewer employees, governmental and church plans, and new businesses during their first three years would be exempted from this rule.
Automatic escalation would increase default contributions by 1% a year until they reached 10% of pay. Participants could opt out or elect a different contribution amount as under current law. These plans would be required to have a qualified default investment alternative as defined in Department of Labor regulations. The new requirement would be effective beginning in 2022.
02 Required Minimum Distributions Could Start Later
If participants postpone retirement, their benefits can continue to compound on a tax-deferred basis if allowed to remain in a tax-favored retirement plan. Therefore, if payments are required to start later, account balances could be higher.
The SECURE Act changed the age at which benefits must commence from 70 ½ to 72. SECURE Act 2.0 would further increase the age at which required minimum distributions (RMDs) must begin to 75, and would exempt those with combined defined contribution plan/IRA balances up to $100,000 (measured at age 75) from having to take RMDs.
03 More Flexible Annuity Payments
The SECURE Act made it easier for defined contribution plans to include annuity options, which can insure that participants don’t outlive their retirement plan income. However, with a few exceptions the distribution rules prohibit non-level payments, including certain death benefits, and may discourage participants from electing annuities.
SECURE Act 2.0 would:
- Permit annuities that provide increased benefits in later years and return of premium death benefits.
- Increase the maximum amount available to purchase a qualified longevity annuity contract (QLAC) – a form of annuity that commences payments after the regular deadline, from the lesser of $125,000 or 25% of the account balance to $200,000.
04 Plans Could Match Student Loan Repayments
Younger participants may be unable to contribute to 401(k) and 403(b) plans due to the burden of student debt repayments. SECURE Act 2.0 enables plans to match qualifying student loan repayments, which was not permitted by prior IRS guidance.
05 Incentives Could be Provided to Encourage Participation
Current law prohibits an employer from providing any benefits other than matching contributions to employees who elect to participate in 401(k) plans. SECURE Act 2.0 would allow employers to provide incentives of small value, such as gift cards.
06 Higher Catchup Contributions Would Be Allowed
The $6500 catchup contribution currently available to participants age 50 and older (in addition to regular contributions) would be increased to $10,000, indexed for inflation, for participants 60 and older.
07 403(b) Annuity Plans Could Join Pooled Employer Plans
The new Pooled Employer Plan (PEP) option, created by the SECURE Act to make professionally managed plans with potentially lower costs available to smaller employers, would be opened up to 403(b) annuity plans.
08 Long-Term Part-Time Employees Would Be Eligible to Participate Sooner
The SECURE Act will require plans to cover long-term part-time employees who complete 500 hours of service in three consecutive years; however, they would not be required to receive employer contributions. SECURE Act 2.0 would shorten the eligibility service period for long-term part-time employees to qualify to contribute to 401(k) and 403(b) plans from three years to two years of service.
09 Higher Tax Credits for Employers and Employees
To encourage plan startups, the new plan tax credit available for small employers with up to 50 employees would be increased to 100% of administrative costs up to $5000. An additional credit beginning at 100% of contributions would be available to sponsors of defined contribution plans through the fifth year, but the credit would be capped at $1000 per employee. Employers with 51-100 employees would be eligible for a reduced credit. The new plan credit would be available to employers participating in a multiple employer plan (MEP) even if the MEP has been in existence for three years.
The Savers’ Credit for low and middle income participants would be simplified and increased.
Is SECURE Act 2.0 Likely to Become Law?
SECURE Act 2.0 appears to have broad bipartisan support. A bill with some similar provisions was introduced in the Senate earlier this year. However, the SECURE Act also had broad support and Congress still took a surprisingly long time to pass it.
Although SECURE Act 2.0’s chances of passage appear decent, it is too soon to count on seeing it become law. However, even if SECURE Act 2.0 is not enacted, some of these provisions could be folded into other legislation, such as multi-employer pension plan reform or a new CARES Act. The pension community should keep its fingers crossed while urging their Representatives and Senators to support SECURE Act 2.0.
About the Author
Carol I. Buckmann, JD, is the co-founding partner of Cohen & Buckmann, P.C. She is one of the top-rated employee benefits and ERISA attorneys in the U.S., and deals with some of the foremost issues in ERISA, including pension plan compliance, fiduciary responsibilities, and investment fund formation.
The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust®, its subsidiaries or affiliates.