SECURE Act 2.0: Changes to retirement planning (2022)


By The Human Interest Team

Key Takeaways

  • The SECURE (Setting Every Community Up for Retirement Enhancement) Act was signed into legislation by the Senate on December 19, 2019.

  • New retirement reform legislation—often called SECURE Act 2.0—was proposed in October 2020 and includes 45 provisions designed to promote retirement savings.

  • SECURE Act 2.0 was passed by the House of Representatives in March 2022 and will move to the U.S. Senate for a vote.

In October 2020, 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.

On May 5, 2021, the House Ways and Means Committee voted to send an updated SECURE Act 2.0 to the full House. On March 29, 2022, the House passed SECURE Act 2.0. The bill will now move to the Senate for a vote before it can be signed into law by the Executive Branch.

The October 2020 bill included 36 provisions, sponsored by both Democrats and Republicans. In its current form, the Securing a Strong Retirement Act of 2021 now contains 45 provisions.

We’ll cover what you need to know, including updates from the most recent legislation.

Secure Act 2.0: What it is, and isn’t

The SECURE (Setting Every Community Up for Retirement Enhancement) Act was signed into legislation by the Senate on December 19, 2019. The original bill made some much-needed adjustments to the country’s retirement system. However, it wasn’t a comprehensive solution to the retirement crisis in America.

In May 2021, Secure Act 2.0 passed unanimously in the House Ways and Means Committee. The bill was stalled in 2021 as focus turned to President Joe Biden’s multitrillion-dollar Build Back Better social spending and climate bill (which, as of mid-2022, is still in limbo). Following a 414-5 vote from the House of Representatives in March 2022, SECURE Act 2.0 now heads to the Senate for a vote.

While it doesn't provide a broad fix, SECURE Act 2.0 does build on the improvements of the SECURE Act. It introduces a variety of small, yet significant, changes for small businesses and those saving for retirement.

  • 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

Finally, auto-enrollment and auto-escalation

Perhaps 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 December  31, 2022.

Automatic contributions will be required to be at least 3% and may be up to 10% of employee compensation. If less than 10%, contribution rates would increase by 1% each year until 10% is reached. The following would be exempt from both auto-enrollment and auto-escalation:

  • Small businesses with fewer than 10 employees

  • New businesses less than 3 years old

  • Churches and governments

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. Finally, existing plans aren’t required to add auto-enrollment—current 401(k) and 403(b) plans will be grandfathered under new proposals.

SECURE Act small business incentives

There’s a lot to cover here! Below are several incentives that SECURE 2.0 provides for small businesses.

  • Doubles the tax credit for starting a company retirement plan: For small businesses with up to 100 employees (up from 50 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 (which remains unchanged) for each of the first three years—a total of $15,000.

  • Expands who is eligible for the start-up tax credit: The legislation would also extend start-up tax credits to 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 contributions: Employers would receive a new tax credit—a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000 (excluding employer contributions as elective deferrals under Code Sec. 402(g)(3) or to a defined benefit plan under Code Sec. 414(j)). This additional credit would be limited to employers with 50 or fewer employees and phased out for employers with between 51 and 100 employees as follows:

    • 100% in the first and second years

    • 75% in the third year

    • 50% in the fourth year

    • 25% in the fifth year

    • Zero credit for tax years thereafter

  • Maintains 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 may offer small, immediate financial incentives to save for retirement

Already, an employer is the number one reason people start saving for retirement—and now that may be even more true. With SECURE Act 2.0 legislation, employers would be allowed to offer small immediate incentives, like low-amount gift cards, to encourage joining and contributing to employer-sponsored retirement plans.

Increased savings flexibility for those 60 and over

For those nearing retirement, the bill would increase how much and how long individuals can save.

Expanded catch-up contribution ages: The October 2020 proposal increased catch-up contributions for those 60 and over to $10,000 for employer-sponsored 401(k)s and 403(b)s, or an additional $5,000 for SIMPLE plans. However, new legislation expands catch-up contributions to include participants aged 62, 63, or 64 (but not older than 64) by the end of the 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 2023. (Catch-up contributions for employer-sponsored plans are already indexed to inflation.)

Increased mandatory RMD age from 72 to 75: Proposed legislation would bump the required minimum distribution (RMD) age to 75 (from age 72, which took effect with the SECURE Act), allowing individuals to keep saving longer. The bill would eliminate 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 RMDs from 50% to 25%. And if failures to take an RMD are corrected in a timely manner, excise taxes are further reduced from 25% to 10%.

However, instead of immediately increasing the required minimum distribution age to 75, new provisions suggest staggering the increases of minimum distribution age to:

  • 73 starting on January 1, 2023

  • 74 starting on January 1, 2030

  • 75 starting on January 1, 2033

New proposals would allow charitable distributions to count as part of the annual RMD from a 401(k) once reaching a certain age.

New programs to help employees pay down their student loans

The new bill would formalize a way 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. These employees would be eligible to receive an employer match (and would remain on the same vesting schedule as if they were contributing to a retirement plan).

Suggested updates in the May 2021 bill allow participants receiving a matching contribution for student loan repayments to be separate from the rest of a company’s employees for ADP testing.

An established database for lost retirement accounts

A proposed change in SECURE Act 2.0 would require the Pension Benefit Guaranty Corporation to update its existing online database. This could make it easier for employees to find lost retirement accounts.

Other notable changes for individuals saving for retirement

The SECURE Act 2.0 would simplify retirement plan disclosures. 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.) It’d also allow taxpayers to avoid harsh penalties for making inadvertent errors while managing an IRA that can lead to a loss of retirement savings (and protect retirees who unknowingly receive retirement plan overpayments).

There are several proposed changes related to annuities, that help individuals use this investment strategy to generate lifelong income. New proposals would also allow optional treatment of employer contributions as Roth contributions. Employees may designate matching contributions as Roth contributions in qualified Section 401(k), 403(b), or 457(b) plans.

It would modernize family attribution rules that disproportionately affect women business owners. Currently, spouses in the nine community property states must equally split all assets acquired during a marriage. Businesses are currently considered joint-owned, which can especially undermine women-owned businesses during disputes in a family or separation. New proposals would update attribution rules so businesses of spouses would be treated separately. It’d also make it easier for military spouses who change jobs frequently to save for retirement.

Finally, SECURE Act 2.0 would change hardship withdrawal rules for 403(b) plans so they’re the same as 401(k) plans. In addition to elective deferrals, an employee may choose qualified non-elective contributions, qualified matching contributions, and earnings on any of these contributions (including elective deferrals). It would also expand hardship withdrawals to include penalty-free withdrawals from retirement plans in cases of domestic abuse.

Other notable changes for employers

New proposals would raise awareness of the “Saver’s Credit.” The October 2020 version proposed increasing and modernizing the “Saver’s Credit,” the existing federal tax credit for contributions to a retirement plan or IRA. Rather than create a single credit rate of 50%, May 2021 provisions now simply require the Treasury Secretary to take steps to increase public awareness of the credit. It also requires the Treasury Secretary to report back to Congress within 90 days after enactment to summarize the impact of these efforts.

SECURE Act 2.0 would extend the time for employers to make beneficial discretionary retirement plan amendments. Under the proposal, if an employer amends an annuity plan, pension, profit-sharing, or stock bonus to increase benefits accrued under the plan in the preceding plan year (other than increasing matching contributions), the amendment would not cause the plan to fail to meet qualification requirements. This would enable employers with existing 401(k) plans to make plans more favorable to rank-and-file workers after the end of a plan year.

It would reduce requirements for part-time workers by one year. The SECURE Act enabled “long-term, part-time workers” to participate in 401(k) plans. Under that provision, employers with a 401(k) plan were required to offer the plan to employees that complete either one year of employment (not to exceed 1,000 hours); or three consecutive years of employment where they’ve worked at least 500 hours. New provisions would reduce that three-year rule to two years.

It would allow sole proprietors to make retroactive first-year elective deferrals.

Finally, SECURE Act 2.0 would change top-heavy testing for excludable employees. These new provisions would allow employers to perform top-heavy testing separately on excludable and non-excludable employees. This could remove financial incentives to exclude employees from 401(k) plans—and ultimately, increase retirement plan coverage to more employees.

What’s next for the SECURE Act 2.0

While there’s some time before legislation enacting SECURE 2.0 will be approved, there could be exciting changes that help millions of hard-working employees shore up their retirement savings. We’ll keep you posted on any developments.

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.

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The Human Interest Team

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The Human Interest Team

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.

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