In late October 2020, additional new retirement reform legislation was proposed by Ways and Means Committee Chairman Richard Neal, D-Massachusetts, and Ranking Member Kevin Brady, R-Texas, called the Securing a Strong Retirement Act (SECURE Act 2.0). We’ll cover what you need to know.
What it is, and isn’t
While last year’s SECURE (Setting Every Community Up for Retirement Enhancement) Act made some much-needed adjustments to the country’s retirement system, it wasn’t a comprehensive solution to the retirement crisis in America.
Like its predecessor (“some are calling it SECURE 2.0”), it doesn’t provide a broad fix, but it does build on the improvements of the SECURE Act, introducing a variety of small but significant changes for both small businesses and those saving for retirement.
Broadly speaking the proposed legislation:
- Promotes saving earlier for retirement, as well as increasing some limits
- Boosts incentives for small businesses offering retirement plans
- Offers those age 60 and over more flexibility for saving as they approach retirement
Here’s what the new Act will look like for employers:
Maybe the most significant changes for savers would be the requirement for 401(k), 403(b), and SIMPLE plans to automatically enroll eligible employees in plans initiated after January 1, 2022.
In addition, it will require plans to begin auto-escalated contributions at 3% or more, up to 10%, also for plans initiated after January 1, 2022.
For both auto-enrollment and auto-escalation, small businesses with fewer than 10 employees, new businesses less than 3 years old, and churches and governments would be exempt. Employees may still opt out of plans, but research demonstrates this is one of the easiest methods to jumpstart retirement savings and make that saving a habit.
Small business incentives
There’s a lot to cover here!
- Double the tax credit for starting a company retirement plan: For small businesses with 50 or fewer employees, the SECURE Act 2.0 legislation would boost the existing tax credit from 50% to 100% of plan start-up costs, capped at $5,000 per employer for each of the first three years – a total of $15,000. With SECURE 2.0, the credit would eventually become available for companies with between 50 – 100 employees.
- Expanding who is eligible for the start-up tax credit: The legislation would also extend the start-up tax credit to those employers based on the year they join existing plans, rather than only offering the credit for the first three years of the plan’s existence.
- Credits for employer match contributions: With SECURE 2.0, employers would benefit from a tax credit that would offset up to $1,000 of employer contributions per employee in the first year of a defined contribution plan, phased down gradually over five years.
- Maintained tax credit for using auto-enrollment: The tax credit of $500 per year for the first three years of electing auto-enrollment is still available.
Employers allowed to offer small, immediate financial incentives to save for retirement
Already, an employer is the #1 reason why people start saving for retirement – and now that may be even more true. With the SECURE Act 2.0 legislation, employers would also be allowed to offer small immediate incentives, like low-amount gift cards, to encourage joining and contributing to employer-sponsored retirement plans.
And what it will look like for those saving for retirement:
Savings flexibility for those 60 and over — and a perk for those with student loans
For those nearing retirement, the bill would increase how much and how long individuals can save.
- New catch-up contribution at age 60: Catch-up contributions for those 60 and over would be increased to $10,000 for employer-sponsored 401(k)s and 403(b)s, or an additional $5,000 for SIMPLE plans, beginning after the 2020 tax year.
- IRA catch-up contribution indexed to inflation: The catch-up contribution limit to IRAs for those aged 50 and over (currently $1,000) would be indexed to inflation starting in 2022. (Catch-up contributions for employer-sponsored plans are already indexed to inflation.)
- Increased mandatory RMD age from 72 to 75: The proposed legislation would bump the required minimum distribution age to 75 (from age 72, which took effect with the SECURE Act), allowing individuals to keep saving longer. The bill also eliminates the RMD for those who have less than $100,000 in their 401(k) or IRA at the end of the year before they turn 75, and it reduces the tax penalty for failing to take a required minimum distribution.
For younger employees, the new bill would formalize a method for employers to help individuals pay down a student loan. Instead of contributing to a 401(k), 403b, or SIMPLE IRA plan, employees can make contributions to pay off their student loans. Meanwhile, they’d still be eligible to receive an employer match in their company’s retirement plan for those payments (and on the same vesting schedule as if they were contributing to a retirement plan). Read more about a pioneering company here.
A proposed change in SECURE Act 2.0 would make it easier for employees to find lost retirement accounts by creating a national, online, database of lost accounts.
Other notable changes
The Securing a Strong Retirement Act, SECURE Act 2.0, would make a few more valuable changes to:
- Make retirement plan disclosures simpler. Required retirement plan disclosures are notoriously lengthy and difficult to parse. (Note: We already make our disclosures understandable and useful. Ask us to see one.)
- Make it easier for military spouses who change jobs frequently to save for retirement.
- Allow charitable distributions to count as part of the annual required minimum distribution from a 401(k) once reaching a certain age.
- Reduce the tax for failing to take a required minimum distribution.
- Increase and modernize the “Saver’s Credit,” the existing federal tax credit for contributions to a retirement plan or IRA. The bill would create a single credit rate of 50% (replacing the existing, more complicated tiered structure of 10%, 20%, and 50% credits), and raise the maximum per-person credit from $1,000 to $1,500.
- Adjust several aspects related to annuities, in order to help individuals seeking to use this investment strategy to generate lifelong income.
- Allow taxpayers to avoid harsh penalties for inadvertent errors managing an IRA that can lead to a loss of retirement savings and protect retirees who unknowingly receive retirement plan overpayments.
While there’s still some time before legislation enacting SECURE 2.0 could be moved forward, there could be exciting changes that help millions of hard-working employees shore up their retirement savings. Are you ready to start a retirement plan for your business? Contact us to learn more about our small business 401(k) and 403(b) plans.
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.