Significant changes in the design of the 401(k) plan and similar defined contribution pension plans are advancing again in Congress. On March 29, the House overwhelmingly approved the bipartisan Securing a Strong Retirement Act by a vote of 414 to 5.
The bill, dubbed “SECURE Act 2.0,” builds on the Setting Every Community Up for Retirement Enhancement Act (SECURE), enacted in December 2019 to improve retirement savings opportunities for workers.
“By expanding automatic enrollment in employer-provided retirement plans, simplifying the rules for small businesses, and helping those close to retirement save longer, this legislation will help increase Americans’ access to retirement funds and helping families save for the future,” the House Majority Leader said. Steny Hoyer (D-Md.).
The Senate is considering its own version of SECURE Act 2.0, the Retirement Security and Savings Act, which shares many similar provisions with the House bill. However, “as the Senate legislative process moves forward, lawmakers may try to incorporate other proposed features into separate House and Senate bills,” according to human resources consulting firm Mercer.
If the Senate passes a SECURE Act 2.0 measure, the two chambers would likely attempt to reconcile their separate versions.
The key changes to the pension plan brought about by the SECURE Act 2.0, as passed by the House, are highlighted below.
Mandatory Registration/Automatic Escalation
SECURE Act 2.0 would require employers who establish defined contribution plans to automatically enroll new employees, when eligible, for a pre-tax contribution level of 3% of the employee’s salary. This level would increase annually by 1 percent up to at least 10 percent but not more than 15 percent of the employee’s salary. Employees could opt positively for a different contribution.
There is an exception for small businesses with 10 or fewer employees, those in operation for less than three years, church plans, and government plans.
“The main benefit of SECURE Act 2.0 is that employers introducing new pension plans would be required to automatically enroll employees,” said Jonathan Barber, head of compensation and benefits policy research. at Ayco, a Goldman Sachs company that provides financial advice. . Although auto-enrollment has steadily grown as a plan feature, it has never been required.
“Far too many Americans are not taking advantage of company-sponsored 401(k) plans, and this mandate would help drive up enrollment rates,” Barber said.
Develop and ‘Roth-ify’ catch-up contributions
Under current law, employees who have reached age 50 can make additional catch-up contributions to a 401(k) or 403(b) plan. The catch-up contribution limit for 2022 is $6,500, indexed annually for inflation, for a total contribution limit of $27,000.
SECURE Act 2.0 maintains the existing catch-up contribution limits for those age 50, but increases the annual catch-up amount to $10,000 for participants age 62-64, beginning in 2023. This higher limit would be also indexed to inflation.
Under current law, catch-up contributions to qualified employer-sponsored pension plans can be made on a pre-tax or Roth basis (if permitted by the plan sponsor). Roth contributions are made with after-tax dollars that can be withdrawn tax-free after retirement.
SECURE Act 2.0 provides that beginning January 1, 2023, all catch-up contributions to employer-sponsored qualified retirement plans would be subject to Roth tax treatment, allowing the government to tax those dollars sooner.
Currently, the Individual Retirement Account (IRA) contribution catch-up amount is $1,000 (non-indexed) for people who have reached age 50. SECURE Act 2.0 indexes this limit for inflation from 2023.
Allow Roth Matching Contributions
Currently, employer matching contributions must be made to employees’ pre-tax 401(k) accounts. Under SECURE Act 2.0, plan sponsors have the ability to allow employees to elect to have some or all of their matching contributions treated as Roth contributions for 401(k) plans. Employer matching contributions designated as Roth contributions would not be excluded from employees’ gross income.
Delay mandatory distributions
The original SECURE Act increased the age at which participants in employer-sponsored defined contribution plans and traditional (non-Roth) Individual Retirement Accounts must begin receiving Required Mandatory Distributions (RMDs) to 72, from 70 -1/2.
SECURE Act 2.0 further increases the age to start RMDs to 73 in 2022, 74 in 2029 and 75 by 2032.
Accelerate the participation of part-time workers
The original SECURE Act expanded the eligibility of long-term part-time workers to contribute to their employer’s 401(k) plan. SECURE Act 2.0 “would expedite the addition of long-term part-time workers as eligible participants” by shortening the eligibility measurement period that begins in 2021 from three to two years, wrote Katharine Finley, senior policy adviser. Compliance at Hall Benefits Law in Atlanta. As a result, “the first group of long-term part-time workers would become eligible for participation in the optional deferral of defined contribution plans from January 1, 2023”, one year earlier than under current law.
Allow student loan matching
Employers’ 401(k) plan matching contributions have traditionally been based on plan participants’ optional deferrals in their retirement accounts. Although the IRS has allowed employers to match 401(k) contributions based on employees’ student loan payments, even if employees do not contribute themselves in retirement, compliance issues remain due to lack of authorizing legislation. SECURE Act 2.0 would provide a legal basis for employers to adopt this feature.
Matching contributions for student loan repayments must vest on the same schedule as other matching contributions.
Tying employers’ 401(k) matching contributions to employees’ student loan payments could also help plan sponsors pass the annual 401(k) plan’s anti-discrimination test, which prevents plans from favoring high earners. . or key employees, Finley said.
“If employee demographics lead to an increase in matching contributions for non-high-compensated individuals as a result of incorporating this change, it may be worth considering the change based on historical test results,” a- she pointed out.
Additional Provisions
Among other key changes, SECURE Act 2.0 would also:
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Create an online database of lost and found retirement savings to the Department of Labor for workers and retirees to find “lost” retirement accounts left with former employers who may have gone bankrupt or merged with another organization.
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Develop the possibilities of self-correction, including for participant loan errors and employee optional deferral failures.
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Raising public awareness of the Credit for Retirement Savings Contributions (also known as savings credit), available to low- and middle-income workers.
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Extension to 403(b) retirement plans some of the design features of 401(k) plans.
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Removing certain obstacles to the supply of life annuities as an investment option under a retirement plan.
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Aallow associations to come together to offer multi-employer defined contribution plans to their employees, as for-profit employers were permitted to do under the original SECURE Act.
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