While the vast majority of proposed legislation on Capitol Hill these days sees strong support on one side of the aisle and strong opposition on the other, retirement saving reform is one subject both Republicans and Democrats can apparently agree on.
Chances of another major retirement reform bill becoming law this year increased significantly last week when the House Ways and Means Committee showed a rare sign of bipartisanship by unanimously passing the Securing a Strong Retirement Act of 2021–more commonly known as SECURE 2.0.
While the overarching goal of the bill is to encourage and help Americans to save more for retirement, most of the provisions that will enable workers to do so largely revolve around 401k plans.
As its nickname implies, SECURE 2.0 would build on a number of items included in 2019’s SECURE Act. The bill contains a number of provisions to encourage employees to save more, but it also contains a number of important revenue-raising changes—changes that accelerate taxation of retirement benefits.
Here, courtesy of a recent brief written by T. Lake Moore V of legal firm McAfee & Taft, is a summary of five of the key changes currently included in SECURE 2.0 that impact 401k plans.
Expanding automatic enrollment
Automatic enrollment features would be required for new plans. Any plans existing when the bill becomes law (if and when that may happen) would be grandfathered and not be required to implement automatic enrollment. The automatic enrollment feature must be an EACA (eligible automatic contribution arrangement), meaning it would require permissible withdrawals by participants and be subject to the uniformity rule.
Each participant would initially be subject to a 3% automatic contribution, and that would increase by 1% each year up to at least 10%, but the employer could choose to increase the cap up to 15%. Of course, an employee could always affirmatively elect a different contribution. There are some exceptions for certain types of plans and employers.
RMD age increase
The bill proposes to increase the age for required minimum distributions (RMDs) yet again. Recall that the original SECURE Act increased the RMD age from 70.5 to 72. SECURE 2.0 proposes to gradually increase the RMD age from 73-75 over the course of 2021-2032.
While the McAfee & Taft brief doesn’t mention them, SECURE 2.0 also includes provisions that would reduce the penalty for failing to take RMDs from a 50% tax on the amount not withdrawn to 25%, and would exempt retirement plan participants from taking them if their plan balance is less than $100,000 on Dec. 31 of the year before they turn 75.
Student loan repayments
SECURE 2.0 builds on the student loan relief that was included in the CARES Act in 2020 and more recently in the American Rescue Plan Act that passed earlier this year.
When employees make payments on student loans, SECURE 2.0 allows employers to treat those payments as if they were elective deferrals to the 401k plan and make “matching” contributions to the participant’s 401k account. Special nondiscrimination testing is permitted in the event too many non-highly compensated employees stop making traditional elective deferrals to the plan and instead make student loan payments.
The match would be permitted on “qualified student loan payments.” The student loan payments, plus actual elective deferrals to the 401k plan, cannot exceed the existing annual limit on deferrals ($19,500 in 2021), and student loan payments must be made for “qualified higher education expenses,” which is essentially the cost of attendance.
Matching contributions for student loan payments must be made at the same rate as traditional elective deferrals, and the employees must otherwise be eligible to receive the match if they instead chose to make elective deferrals. Finally, the matching contributions for student loan payments must vest under the same schedule as other matching contributions.
Changes to catch-up contributions
Currently, participants over the age of 50 are permitted to contribute elective deferrals in excess of the normal limit (in 2021, an extra $6,500). SECURE 2.0 increases the contribution limit to $10,000 for participants between age 62 and 65, and the limit would continue to be adjusted for cost of living changes. Additionally, catch-up contributions to IRAs would be indexed and increase with cost of living changes.
In a revenue-raising move, SECURE 2.0 requires all catch-up contributions to be designated Roth contributions—presumably to allow the government to reap the income tax benefits sooner than it otherwise would.
Roth matching contributions
Participants would be given the opportunity to elect for employer matching contributions to be designated as Roth. While this may help participants in their tax planning strategy, this is also a revenue-raising mechanism (i.e. it requires taxation in the year of contribution rather than when the matching contributions are finally distributed likely years or decades later).
The McAfee & Taft brief concludes by stressing this is just a small sample of the many changes included in SECURE 2.0, and predicts it could make its way through Capitol Hill to President Joe Biden’s desk in the White House by late summer or early fall.
SEE ALSO:
- 401k-Friendly ‘SECURE 2.0’ Bill Advances in House
- As SECURE 2.0 Heads to Markup, Advisors Indicate Strong Support
- Senate HELP Committee to Address Retirement Security Thursday
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.
