AUTHOR’S NOTE: This is the second part of a two-part series: Part 1 focused on SECURE 2.0 provisions that increased liquidity in ways that may prompt some participants to reduce deferrals and other participants to increase leakage. Part 2 evaluates five other “impactful” SECURE 2.0 provisions. I believe Congress continues to focus on the wrong issues.
Failing to Prioritize, Again: If Congress were serious about improving retirement security, it would prioritize actions to address Social Security and Medicare funding shortfalls (and Medicaid funding as well, given that one in five of today’s Medicare beneficiaries are dual eligible). The Congressional Budget Office (CBO) projects we will exhaust Social Security (Old Age and Survivors) trust assets in less than 10 years (2033).[i] The Committee for a Responsible Federal Budget and Medicare Trustees project that we will exhaust the Hospital Insurance (HI) Trust Fund in less than 5 years (2028).[ii]
“If we don’t take care of this, we don’t make it to the men’s room. Is that clear enough for you?”[iii]
The Medicare trust fund doesn’t apply to Part B (non-hospital health care providers, services) nor to Part D (outpatient prescription drugs). Like Medicaid, those programs are pay as you go—so, they add to our $2+ trillion/year annual deficits and to our $31+ trillion of national debt.[iv]
And, we don’t need Congress to add or expand these entitlements by promising someone else will pay nor allocate the increased funding burden to people too young to vote or generations yet unborn.[v]
Congress resolved our retirement savings “access” issue 49 years ago with the passage of ERISA (for workers whose employer does not sponsor a tax-qualified retirement plan). They reached everyone else 42 years ago with the passage of the Economic Recovery Tax Act of 1981 by making IRAs universally available to all wage earners.[vi] Studies show those who prioritize retirement can successfully prepare—but only if they can rely on promised Social Security and Medicare entitlements.[vii]
Evaluating the ‘most impactful provisions’[viii]
Impactful Provision #1: Mandates Are Mistakes – Automatic Enrollment, SECURE 2.0, Section 101[ix]:Employers establishing a new retirement savings plan (401(k) or 403(b)) will be required to automatically enroll employees. America’s benefits experience with mandates is spotty. Such a mandate may reduce adoption of plans and/or prompt plan sponsors to lower the rate of employer contributions. So, “Starter 401k” plans may dominate future adoptions—featuring automatic enrollment up to IRA dollar limits, qualifying for improved tax credits, but not likely to prompt plan sponsors to improve in the future. SECURE 2.0 Sections 102, 121.
According to the 65th Annual Survey by the Plan Sponsor Council of America, data as of 12/31/21, 75% of survey respondents who had 200 or more employees were using auto features. For comparison, only 39% of employers with less than 200 employees had adopted auto features. Less than half of workers at firms with less than 50 employees had access to an employer-sponsored retirement savings plan.[x]
So, since the majority of employers without 401k plans are small employers and since most small employers who have a plan have already rejected adding automatic features, the auto-enrollment mandate could become a barrier. Consider, for comparison, the health reform mandates that chilled adoption of employer-sponsored health coverage and led to reductions in employment and hours worked to avoid the employer mandate.[xi] Better Answer: Allow plan sponsors to choose the plan designs that best meet their needs/goals.
Impactful Provision #2: Lowering Employer Contributions by Matching Student Loan Payments – SECURE 2.0, Section 110[xii]: For plan years after December 31, 2023, plan sponsors can amend their plans to provide a match on student loan payments. That change will lower participant deferrals and the associated tax preferences as well as reduce the employer matching contributions participants receive. It also has the potential to delay the payoff of student loans and increase the cost of student debt.
Better answer: Voluntary adoption of automatic enrollment at levels sufficient to qualify for the maximum employer contribution, coupled with plan loans “done right”—processing that incorporates 21st Century loan functionality—electronic banking, behavioral economics concepts, “nudges” and processes, and a line-of-credit structure. (See sidebar illustration at right)
Impactful Provision #3: More of What We Don’t Need – Delayed RMD – SECURE 2.0, Section 107[xiii]:Only those who can afford to forego Required Minimum Distributions (RMD), those who do not need to use retirement savings to generate retirement income are likely to defer commencement. Better answer: If the issue is a concern about longevity,[xiv] minimizing the chances that individuals will exhaust their retirement savings, the better alternative would have us return to pre-SECURE provisions of an age 70½ Required Beginning Date but cap RMD at 5% of the prior year end account balance (a 5% RMD is generally reached by age 80).
Impactful Provision #4: Who Asked For That? Roth Employer Match – SECURE 2.0, Section 604[xv]: Why add a provision where the match, once imputed as wages, would become subject to employment taxes? Not only would employer AND employee FICA and FICA-Med taxes increase, costs would also increase for plan sponsors who prefer to use a vesting schedule.[xvi] Better answer: Add in-plan Roth conversion functionality.
Impactful Provision #5: More of What We Don’t Need – More Catch-up for Those Ages 60, 61, 62, 63; and Roth-only Catch-up for HCEs – Secure 2.0, Sections 109, 603[xvii]: Higher limit only applies to those ages 60-63 who contribute more than the IRC §402(g) limit ($22,500 in 2023) and perhaps those Highly Compensated Employees who need to recharacterize deferrals.
Remember, the median 401(k) contribution is ~$2,200 a year (excluding consideration of the ~20% of eligibles who do not contribute).[xviii] Better Answer: Voluntarily adopt in-plan Roth conversion, after-tax 401(a) contributions for the non-highly compensated employees and either a payroll-deducted IRA as a Voluntary Benefit[xix] or Deemed Traditional and Roth IRAs.
Other candidates for reconsideration
Pay Taxes So Others Can Save – Savers Credits for Those Who Don’t Pay Taxes – SECURE 2.0, Section 103: We have $2+ Trillion in annual deficits for as far as the eye can see or the CBO cares to project; and $31+ Trillion in national debt.[xx] Why raise income taxes (today, or later) on those who already pay income taxes to provide a tax preference to the substantial percentage of American households who pay no federal income tax today.[xxi]
Making the Saver’s Credit refundable significantly raises the cost of the Saver’s Credit. Better answer: Allow for a “carry forward” to a future tax year for those who owe no income tax today—so those who earned the Saver’s Credit today could apply it to any income taxes they might owe in a future year.
Access Where It Isn’t Needed – Reduced Eligibility Requirements for Part Time Workers – SECURE 2.0, Section 125: SECURE gave us a 3-year eligibility requirement for part-time workers (working 500 to 999 hours a year). SECURE 2.0 changes that to 2 years. Both changes are as likely to reduce employment by part-time workers as they are to prompt retirement savings[xxii]. Better answer: Because almost all workers are paid electronically today, encourage employers to promote a split of net paychecks to facilitate saving in a Roth IRA.
I’ll stop here. But, I am always happy to review, discuss, and debate. I always appreciate your insights, and criticisms. Please correct me if you believe the above changes are necessary and valuable. Contact me at: jacktowarnicky@gmail.com
SEE ALSO:
Disclaimer No. 1: My comments are my own based on my past experiences in plan sponsor roles and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.
Disclaimer No. 2: Information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not (and you/others should not use it as a substitute for legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.
[i] Congressional Budget Office (CBO), CBO’s 2022 Long Term Projections for Social Security, December 2022. “… If the gap between the trust funds’ outlays and income occurs as CBO projects, then the balance in the trust funds will decline to zero in 2033 and the Social Security Administration will no longer be able to pay full benefits when they are due. …” Accessed 2/25/23 at: https://www.cbo.gov/publication/58870 See also: J. Towarnicky, House, Senate Action Needed On Social Security, 10/23/17, Accessed 2/2/23 at: https://www.psca.org/news/blog/house-senate-action-needed-social-security See also: J. Towarnicky, Pension Promises Without Funding Are Mere Dreams, 11/11/18, Accessed 2/25/23 at: https://www.psca.org/news/blog/pension-promises-without-funding-are-mere-dreams
[ii] 2022 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 6/2/22, Accessed 2/25/23 at: https://www.cms.gov/files/document/2022-medicare-trustees-report.pdf Author’s note: Had this article been written one year ago, the Trustees were predicting depletion of the Hospital Insurance trust fund in less than 3 years (2026). See also: Committee for a Responsible Federal Budget, Accessed 2/25/23 at: https://www.crfb.org/our-work/projects/medicare-hospital-insurance-trust-fund
[iii] Conklin, Bourne Identity (2002)
[iv] U. S. Treasury Department, Fiscal Data, What is the national debt? “The national debt ($31.46T) is the total amount of outstanding borrowing by the U.S. Federal Government accumulated over the nation’s history.” Accessed 2/25/23 at: https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/
[v] Attributed to Senator Russell B. Long: “Don’t tax you. Don’t tax me. Tax the guy behind the tree.” See: S. C. Goss, Estimates of the financial effects on Social Security of enacting the Social Security Expansion Act, 2/13/23. Author’s note: In addition to improving benefits to individuals with lower incomes over their working careers, which makes Social Security benefits even more progressive than they already are, the legislation would add significant new taxes on anyone earning in excess of $160,200 (today, or within 10 years, if increases over the past 5 years continue), or a household earning in excess of $250,000: Applies the combined OASDI payroll tax (12.4%) on earnings above $250,000, and once the current maximum of $160,200 reaches $250,000, applies OASDI rate to all wages – but, does not credit the additional taxed earnings for calculating benefits; applies a separate 12.4-percent tax on investment income where income from all sources exceeds $200,000 (single filer), $250,000 (joint filer); Applies a 16.2-percent net investment income (NII) tax on active S-corporation holders and active limited partners – where 12.4% would be paid to OASDI, 3.8% to Treasury General Fund. Accessed 2/25/23 at: https://www.sanders.senate.gov/wp-content/uploads/SandersLetter-2023-0213.pdf
[vi] Employee Retirement Income Security Act of 1974, Pub. L. 93-406, Signed by President Ford on 9/2/74; Economic Recovery Tax Act of 1981, Pub. L. 97-34, Signed by President Reagan on 8/13/81. See also: S. Radpour, E. Conway, T. Ghilarducci, A Universal Retirement Plan Can Reduce Inequality and Prevent Downward Mobility, 12/19/22. “SECURE 2.0 is aimed at making saving for retirement more affordable and expanding access to retirement plans, two valuable goals that are unlikely to be achieved as construed in the bill. While the bill would help improve the retirement system, it will not address the fundamental inadequacies imbedded in it. … To close the gap in access to retirement plans, we need a universal retirement plan similar to various plans that have been proposed. Examples include Guaranteed Retirement Accounts (GRAs) … the Dignity and Security in Retirement plan proposed by Pete Buttigieg’s presidential campaign (… “a historic and free long-term care program to protect people over age 65” … (and) a ‘public option’ 401(k) program. It would require employers to chip in a 3% match to workers’ accounts after a 1.5% contribution from the worker) … While … these (proposed savings plans) may suffer from serious shortcomings, they all have the basic and vital feature of expanding access to retirement accounts.”, Accessed 2/25/23 : https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/
[vii] A. Biggs, The Real Retirement Crisis: It’s Not Where You Think, Statement before the Committee on Ways and Means United States House of Representatives, 2/6/19. “There simply is no retirement crisis. Retirement incomes have been rising rapidly and the vast majority of retirees state they have sufficient money to live comfortably. Retirement savings have risen seven-fold since participation in traditional defined benefit pensions peaked in 1975 and retirement plan participation has increased. … Congress has enacted a number of policies to increase 401(k) participation and improve 401(k) investments. … However, Congress has over 30 years failed to reform Social Security and many Americans have little faith in the program. If there is a retirement crisis, it is in retirement plans run by federal, state and local governments, whose unfunded liabilities exceed even the most pessimistic estimates of shortfalls in retirement saving by U.S. households. … Even if there is no broad retirement crisis, severely inadequate retirement incomes are always a crisis to the retiree who suffers from one.” Accessed 2/25/23 at: https://www.congress.gov/116/meeting/house/108921/witnesses/HHRG-116-WM00-Wstate-BiggsA-20190206.pdf See also: J. Towarnicky, State Mandated, Payroll-Deducted IRAs; 20X, 15X, 12X More Likely to Save? Not Really! 12/27/22. Accessed 2/25/23 at: https://401kspecialistmag.com/state-mandated-payroll-deducted-iras/
[viii] F. Reish, The SECURE Act 2.0: The Most Impactful Provisions, #1-Automatic Plans,1/10/23, Accessed 2/25/23 at: https://fredreish.com/secure-act-2-the-most-impactful-provisions-1-automatic-plans/#more-2653; #3-Student Loan Matches, 1/18/23, Accessed 2/25/23 at: https://fredreish.com/the-secure-act-2-0-the-most-impactful-provisions-2-student-loan-matches/#more-2657; #3-Extension of RMD Start Ages, 1/24/23, Accessed 2/25/23 at: https://fredreish.com/the-secure-act-2-the-most-impactful-provisions-3-extension-of-rmd-start-ages/#more-2663; #4-Optional Treatment of Employer Contributions as Roth Contributions, 1/30/23, Accessed 2/25/23 at: https://fredreish.com/the-secure-act-2-0-the-most-impactful-provisions-4-optional-treatment-of-employer-contributions-as-roth-contributions/#more-2665; #5-Catch-up Contributions for Higher Compensated Must be Roth Contributions, 2/6/23, Accessed 2/25/23 at: https://fredreish.com/secure-act-2-the-most-impactful-provisions-5-catch-up-contributions-for-higher-compensated-must-be-roth-contributions/#more-2669
[ix] Ibid
[x] Congressional Research Service, Private-Sector Defined Contribution Pension Plans: An Introduction, 6/8/22, Accessed 2/25/23 at: https://crsreports.congress.gov/product/pdf/R/R47152
[xi] M. Dillender, C. Heinrich, S. Houseman, Effects of the Affordable Care Act on Part-Time Employment Early Evidence, Journal of Human Resources, 7/1/22. “… The Affordable Care Act (ACA) requires employers with at least 50 full-time equivalent employees to offer “affordable” health insurance to employees working 30 or more hours per week. Employers … can circumvent the mandate by reducing employees’ weekly hours below the 30-hour threshold. We examine ACA’s effects on short-hours part-time employment using difference-in-differences models. We find that the ACA increased low-hours, involuntary part-time employment by 500,000–700,000 workers in retail, accommodations, and food services, the industries in which employers are most likely to reduce hours if they choose to circumvent the mandate.” Accessed 1/9/23 at: http://jhr.uwpress.org/content/57/4/1394.refs or https://peabody.vanderbilt.edu/departments/lpo/faculty-pubs/Henrich.pdf See also: C. Mulligan, The Impact of Health Reform on Employment and Work Schedules, 6/28/15. “… simulation methods and sensitivity analysis suggest that the labor market will likely adjust to the various new costs by reducing weekly employment per person by about 3% compared to what they would have been without the law. The tax incentives will push some workers to work more hours per week (for the weeks that they are on a payroll), and others to work fewer. According to the model presented in this paper, the ACA’s incentives and ultimately its behavioral effects will vary substantially across groups, with the elderly experiencing hardly any new incentives and female workers being most likely to cut their work schedules to 29 hours per week….” Accessed 2/25/23 at: https://www.mercatus.org/research/journal-articles/impact-health-reform-employment-and-work-schedules
[xii] F. Reish, Note vii, supra. “This new opportunity … will message a concern for the benefit of those employees and an acknowledgement of their circumstances.”
[xiii] F. Reish, Note vii, supra.
[xiv] M. Duley, 66% of Americans Are Worried They’ll Run Out of Money in Retirement, 12/29/22, Accessed 2/25/23 at: https://www.gobankingrates.com/retirement/planning/tips-make-sure-dont-run-out-money-retirement/
[xv] Note vii, supra.
[xvi] Plan Sponsor Council of America, 65th Annual Survey, data as of 12/31/21. 55+% of plans with matching contributions don’t immediately vest, and 70% of plans with non-elective employer contributions do not immediately vest.
[xvii] F. Reish, note vii, supra. See also: A. Feuer, Secure Act 2.0: A Missed Opportunity to Enhance Retirement Equity, December 2022. “First, the participants most likely to be willing and able to make catch-up contributions are the small group without retirement concerns. The Congressional Research Service found that in 2018 less than 15% of 401(k) plan participants between the ages of 55 and 65 deferred the maximum amount of $18,500, and less than 50% of all workers earning wages made any deferrals.” Accessed 2/3/23 at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4322626
[xviii] Vanguard, How America Saves, 2022, June 2022. Author Note: Median contribution estimated from applying the median contribution rate of participants (6.1%) times the median salary of participants ($35,345) Accessed 2/25/23 at: https://institutional.vanguard.com/content/dam/inst/vanguard-has/insights-pdfs/22_TL_HAS_FullReport_2022.pdf
[xix] GAO, Individual Retirement Accounts: Government Actions Could Encourage More Employers to Offer IRAs to Employees, GAO-08-590. 6/4/08, Accessed 2/25/23 at: https://www.gao.gov/products/gao-08-590
[xx] CBO, The Budget and Economic Outlook: 2023 to 2033, 2/15/23. “In CBO’s projections, the federal deficit totals $1.4 trillion in 2023 and averages $2.0 trillion per year from 2024 to 2033.” Accessed 2/25/23 at: https://www.cbo.gov/publication/58848
[xxi] H. Gleckman, Tax Policy Center (TPC): The Number Of Those Who Don’t Pay Federal Income Tax Drops To Pre-Pandemic Levels, 10/27/22, Accessed 2/25/23 at: https://www.taxpolicycenter.org/taxvox/tpc-number-those-who-dont-pay-federal-income-tax-drops-pre-pandemic-levels
[xxii] M. Dillender, C. Heinrich, S. Houseman, note xi, supra.
Jack Towarnicky provides independent benefits consulting and serves as a member of aequum, LLC and of counsel for Koehler Fitzgerald, LLC.
