The SECURE 2.0 fixes are ready; now they just need a vehicle to activate them.
An identical bicameral discussion draft containing a number of technical corrections and other SECURE 2.0 clarifications was released late Wednesday by both the House and Senate, aiming to tackle a number of technical issues with the landmark retirement security legislation passed at the end of 2022. The bill would correct errors relating to the inadvertent annulment of pre-tax catch-up contributions in 2024, make the contribution limit for new Starter-K plans equal to the IRA contribution limit as lawmakers intended, and fix a drafting error regarding RMDs, among several others.
The House Committee on Ways and Means Chairman Jason Smith (R-MO) and Ranking Member Richard E. Neal (D-MA), along with House Committee on Education and the Workforce Chairwoman Virginia Foxx (R-NC) and Ranking Member Bobby Scott (D-VA) released the House version. Senate Finance Committee Chairman Ron Wyden (D-OR) and Ranking Member Mike Crapo (R-ID), along with Senate Committee on Health, Education, Labor and Pensions Chairman Bernie Sanders (D-VT) and Ranking Member Bill Cassidy, M.D. (R-LA), released the identical measure in the Senate.
The full text of the technical corrections bill can be found here.
Notably, the technical corrections bill does not include a fix that would permit 403(b) plans to invest in collective investment trusts (CITs). While the Retirement Fairness for Charities and Educational Institutions Act of 2023, passed by the House Financial Services Committee back in May, seeks to grant access to CIT funds for nonprofit employees and public workers participating in 403(b) retirement plans, federal securities laws that would permit 403(b) plans to invest in CITs were not amended by the time SECURE 2.0 was passed in December 2022. So CITs in 403(b)s remains stalled.
Here’s a closer look at why three of the key fixes contained in the new bill are needed.
• Catch-up contributions fix: The bill’s Section 603, which is intended to require that all catch-up contributions be Roth contributions, contains a mistake that inadvertently means no participants will be able to make catch-up contributions (pre-tax or Roth) beginning in 2024. The accidental elimination of a subparagraph in the original text of the bill creates the problem.
The technical corrections draft fixes the error.
Back in August, the IRS released guidance that extended until 2026 the new requirement that any catch-up contributions made by higher income participants in 401(k) and similar retirement plans must be designated as after-tax Roth contributions.
At the same time, the IRS also clarified that plan participants who are age 50 and over can continue to make catch up contributions after 2023, regardless of income.
That much-anticipated guidance solved a pressing matter that had the retirement industry in a bit of a panic. A large number of retirement industry organizations—including prominent lobbying groups and 401(k) recordkeepers—called for the government to delay the key SECURE 2.0 change that was set to kick in Jan. 1 2024, which would have caused many 50-and-older retirement plan participants to lose the ability to make catch-up contributions.
• Starter K fix: While the American Retirement Association was thrilled that one of its signature legislative initiatives and ultimate successes in SECURE 2.0 made the cut, it also quickly identified a much-needed fix to ensure the Starter 401(k) contribution limit would equal the IRA contribution limit as lawmakers intended.
As explained in a Feb. 2, 2023 article by ARA Director of Federal & State Legislative Affairs Andrew Remo, the Starter 401(k) contribution limit included first in the EARN Act and then in the SECURE 2.0 Act is $6,000, which is equal to the 2022 IRA contribution limit. However, the SECURE 2.0 Act delayed the effective date of the Starter 401(k) plan until 2024.
Meanwhile, IRA contribution limits have been raised since 2022 to keep up with inflation. The IRS raised it to $6,500 in 2023 and it will go up to $7,000 in 2024. Because of the SECURE 2.0 drafting oversight, Starter K plans would mistakenly have lower contribution limits than IRAs, putting them at an unwanted competitive disadvantage. The technical corrections draft fixes this, tying the Starter K contribution limit to that of IRAs.
The Starter K plan is a new wage deferral-only safe harbor 401(k) plan that allows employees to save up to—after the fix—$7,000 per year in a tax-preferred retirement account, but does not require employer contributions or complicated testing.
The primary purpose of the Starter K plan is to create a 401(k) product similar to the auto-IRA products now being put forward by over a dozen states.
• RMD fix: Section 107 of SECURE 2.0 bumps up the age when people must start taking required minimum distributions from retirement plans. Congress intended to increase the applicable age at which RMDs are required to begin from age 72 to age 73, for individuals who turn 72 after December 31, 2022 and who turn 73 before January 1, 2033, and to increase the applicable age from age 73 to age 75 for individuals who turn 73 after December 31, 2032.
“However, with respect to the increase from age 73 to age 75, the provision could be read to apply such increase to individuals who turn 74 (rather than 73) after December 31, 2032, which is inconsistent with Congressional intent,” said a letter to the Treasury Department and the IRS sent back in May by the Chairs and Ranking Members of the House Committee on Ways and Means and the Senate Committee on Finance.
So, individuals born in 1959 would mistakenly have two different RMD ages—73 and 75. The technical corrections draft fixes the oversight, ensuring the higher RMD age as lawmakers intended.
What’s next
With the text of the discussion draft now available for public review and comment, the chairmen and ranking members who released it have asked stakeholders to review it and provide feedback to the committees.
What remains to be seen is how the technical corrections bill gets passed. In normal years, it would be tacked on to a must-pass, end-of-year spending bill. But with Congress recently approving legislation to fund the government into January, the SECURE 2.0 technical corrections bill may not find a vehicle to attach itself to until early 2024. If it does get attached to a government funding bill, it could happen prior to deadlines on Jan. 19 or Feb. 2.
Stay tuned…
SEE ALSO:
• SECURE 2.0 Roth Catch-Up Delay: More IRS Guidance to Come
• IRS Comes Through with Roth Catch-Up Contribution Deadline Extension
• SECURE 2.0 Technical Corrections Legislation Coming Soon
• Glitch-Fixing: How 2024 Catch-Up Contributions Could Be Restored in SECURE 2.0
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
