SECURE 2.0 has the potential to transform the way American employers and employees manage retirement plans
A new law is set to change the way retirement works for you and your employees. It’s known as the Securing a Strong Retirement Act of 2022, or H.R.2954. Since it follows in the footsteps of 2019’s Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, the proposed law has the nickname SECURE 2.0.
The law is intended to increase retirement savings for all Americans. One of the main ways it aims to do that is by making enrollment automatic in 401(k)s, 403(b)s, SIMPLE plans and related accounts for employees — a change that affects business owners and H.R. professionals. But other elements are poised to affect employees and individual savers directly — especially the changes to IRA requirements.
New for Employers: Automatic Enrollment and Roth Matching
SECURE 2.0 would mandate — not encourage, but mandate — that employers set up new 401(k) or 403(b) retirement plans that automatically enroll every new hire at a level of 3 percent of the employee’s income. The percentage will then automatically increase every year by 1 percent up to at least 10 percent but no more than 15 percent. It’s possible for that employee to opt out if desired, but in general, this system should massively increase participation in retirement plans.
The proposed law will apply to new plans for new employees in most settings: All current plans will be grandfathered, and churches, companies less than three years old, and companies with less than 10 employees would be exempt.
There’s another big way SECURE 2.0 will change how employers do business.
Today, an employer’s matching contributions for retirement must go into pretax 401(k) accounts. By 2023, if SECURE 2.0 passes, sponsors will be able to give employees the option to have some or all of those matching contributions be treated as Roth contributions, which wouldn’t be excluded from that employee’s gross taxable income.
The law will also make it possible for employers to match 401(k) contributions not just to employees’ contributions, but also to employees’ student loan payments. This could make it easier for plans to pass the annual 401(k) anti-discrimination test, which targets plans that seem to favor highly paid employees.
For Savers: Retirement RMDs and Contribution Caps
An RMD is a required minimum distribution: the amount you must withdraw from an IRA once you reach a certain age. Currently, if you don’t withdraw your annual RMD in full and can’t demonstrate a reasonable cause, the shortfall is hit with a 50 percent excise tax.
Under SECURE 2.0, this would be reduced to 25 percent, or 10 percent if the shortfall is corrected in a timely manner.
Perhaps more significantly, the age when RMDs are first required will rise to 73 starting on January 1, 2023, then to age 74 on January 1, 2030 and to 75 on January 1, 2033.
The other big change for employees is in catch-up contributions for IRAs. After the age of 50, savers are currently allowed to add up to $1,000 a year in additional contributions to an IRA. Those contributions get a tax break up front, and thanks to compound interest, can also add up to a bigger nest egg at retirement.
SECURE 2.0 lifts the $1,000 cap on those over-50 contributions, making the total indexed to inflation. Those aged 62, 63, and 64 have a much, much higher cap on catch-up contributions — up to $10,000 a year. The one catch is that they’ll have to be made to Roth accounts, which means the eventual withdrawals will get taxed.
What Else Is New?
If the law passes (which seems probable, given its bipartisan support), it will have other effects on the way we manage our finances including, but not limited to, the following:
- The new bill instructs the Department of Labor to create a national lost-and-found database to match employees with their retirement plans online.
- Victims of domestic abuse will be able to withdraw money from IRAs and 401(k)s before age 59½ with some penalties waived.
- Nonprofits will be allowed to join together to offer multi-employer retirement plans to their employees.
- Long-term part-time workers will be eligible for retirement plans after two years on the job.
As any political observer knows, nothing is certain. But given that H.R. 2954 has already passed the House 414 to 5, it seems likely to pass through the Senate later this year, possibly without the reconciliation process changing it too much from its current form.
What does stand to change is the current form of retirement savings for all Americans.
Contact us today to learn more about your retirement options.
General background, automatic enrollment, database, etc:
How RMDs work:
Catch-up contribution example math:
Catch-up contribution indexing up to $10,000: