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—passed by the House of Representatives includes 45 provisions designed to promote retirement savings

  • The most recent advancements in June 2022, called the RISE and SHINE Act and EARN Act, included additional provisions to SECURE 2.0

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.

While the original October 2020 bill included 36 provisions, sponsored by both Democrats and Republicans, in its current form, the Securing a Strong Retirement Act of 2021 contains 45 provisions. Additionally, a Senate-approved version of SECURE 2.0 (called RISE and SHINE) and a Senate Finance Committee version (called the EARN Act) both passed in June 2022, adding provisions to the original bill.

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.

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

Finally, auto-enrollment and auto-escalation

Perhaps the most significant changes for savers would be the requirement for 401(k) and  403(b), 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 at least 10% is reached, but not more than 15%. The following would be exempt from both auto-enrollment and auto-escalation:

  • Small businesses with fewer than 10 employees

  • New businesses less than three 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 employers join existing Multiple Employer 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)). Additional credits would be limited to employers with 50 or fewer employees. Eligible employers with more than 50 employees for the preceding taxable year, would undergo a credit phase-in equal to:

    • A percentage of 2% points for each employee for the preceding taxable year in excess of 50 employees.

    • The amount determined above, multiplied by

      • 100% in the first and second years

      • 75% in the third year

      • 50% in the fourth year

      • 25% in the fifth year

  • 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, according to Human Interest research from 2020—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 sought to increase 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), 403(b), 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

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 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.Current laws in the nine community property states provide specific family members—including spouses, children, grandchildren, and parents—with indirect ownership over property obtained during marriage. Because owners must bundle their business with their spouses when performing nondiscrimination testing, this may undermine the plan design by increasing the number of highly compensated employees a business must include in testing. Updates would modernize retirement plan laws to protect family members from being negatively impacted by a spouse’s (or parent’s) business.

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 nonelective 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. As proposed, the Savers Credit will be set at 50% (with an adjusted gross income phase out based on contributions and income). May 2021 provisions will also 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.

RISE and SHINE, EARN Acts: June 2022 updates to SECURE 2.0

Advancing the bill in June 2022, the Senate approved the Retirement Improvement and Savings Enhancement to Supplement Health Investments for the Nest Egg (RISE and SHINE) Act. New provisions aim to build on SECURE 2.0 and include the following changes: 

  • Plan assets may be used to pay some incidental plan design expenses

  • Mandatory cash-out distribution limits are raised from $5,000 to $7,000

  • The addition of the Emergency Savings Act of 2022 (the Emergency Savings Act), would allow 401(k) plans to include emergency savings accounts (meaning participants could make pre-tax contributions to emergency savings accounts)

Additionally, RISE and SHINE removes provisions from the House-approved version, including:

  • Increasing catch-up contribution limits

  • Raising the required minimum distribution age

  • Permitting matching contributions on student loan payments

Additionally, the Senate Finance Committee unanimously passed an amended version of the Enhancing American Retirement Now (EARN) Act in June 2022, which includes an additional 70 proposals. In addition to including catch-up contributions increases and matching contributions for student loan payments (which RISE and SHINE removes), the roughly $38 billion EARN Act includes the following key provisions:

  • New Starter K legislation (which could create retirement plans that streamline regulations and costs for small businesses and startups)

  • Saver’s Match credits would be changed from credits paid in cash as part of a tax refund to a government matching contributions that must be deposited into IRA or retirement plans

  • Changes to 401(k) safe harbor plans, including the ability for safe harbor plans to replace SIMPLE plans mid-year and the addition of a new stretch match option

  • Enhanced tax credits for the cost of new plans (similar to provisions in SECURE 2.0)

  • Reform of family attribution rules (similar to provisions in SECURE 2.0)

  • Top-heavy relief for excludable employees (similar to provisions in SECURE 2.0)

  • Proposed hardship distributions for emergencies

  • Retroactive deduction of profit-sharing increases after the end of the year

  • Permanent rules regarding the use of retirement funds in the case of disaster

What’s next for the SECURE Act 2.0

As of July 2022, the final version of SECURE 2.0 was still undetermined. The Senate Health, Education, Labor, and Pensions (HELP) Committee is expected to merge RISE and SHINE with the EARN Act—which the Senate will then vote on. The final Senate bill will be reconciled with the original version of SECURE 2.0, and both chambers of Congress will vote on its final form.

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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