What SECURE Act 2.0 could mean for 401(k) plans
On March 29, 2022, the SECURE Act 2.0 passed the House with bipartisan support. While the bill still has a long way to go and is subject to change, now’s the time to start educating yourself on the proposed provisions and scoping out a potential course of action. The earlier you start planning, the easier it will be to comply if and when SECURE Act 2.0 becomes law.
Eight key provisions and planning considerations
SECURE Act 2.0 builds on the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019. It’s intended to help expand access to workplace retirement plans, encourage saving, and preserve retirement income. To accomplish these goals, the bill currently contains several provisions that would affect plan design, eligibility calculations, contribution processing, and the timing of distributions. Additionally, many of the proposed changes would be mandatory, meaning plan sponsors would be required to adopt them.
1 Auto-enrollment and auto-escalation
What’s proposed—Employers setting up new 401(k) plans would be required to automatically enroll eligible employees at a default rate between 3% and 10%; they’d also have to automatically increase the rate by 1% annually, up to a specified limit. Employees would still be able to opt out and change their contribution amount. Businesses with 10 or fewer employees and those that have been in operation for less than three years would be exempt.
The purpose—Most people understand the importance of saving for retirement, but inertia often gets in the way. Auto-enrollment and auto-escalation help participants build their savings by putting inertia to work for them. Historically, a small percentage of participants opt out or lower their contribution rate.
Planning considerations—Mandatory automatic enrollment and escalation features could have financial implications for employers, and they’d need help choosing the best plan design to minimize the cost. Financial professionals and third-party administrators (TPAs) can help employers model different scenarios, including matching versus profit-sharing contributions. They can also help employers decide if it makes sense to establish their 401(k) plan before SECURE Act 2.0 is effective so they can have more control over their plan provisions.
2 Roth matching contributions
What’s proposed—Plan sponsors may offer participants the option to designate some or all of their employer matching contributions as Roth.
The purpose—Currently, all matching contributions are pretax. This provision would enable participants to choose the designation—pretax or Roth—that best aligns with their current and expected tax situation. It’s also intended to be a revenue generator. Designated Roth contributions aren’t excludible from participants’ income.
Planning considerations—Approximately 14% of 401(k) plans don’t currently offer Roth contributions.1 These plan sponsors would need to amend their plan document to support this feature. Plan sponsors may want to coordinate with their payroll provider or TPA to determine what the procedures would be for participants who want to designate matching contributions as Roth. Additionally, plan sponsors will want to work with their financial professional, TPA, or recordkeeper to educate participants about the differences between pretax and Roth contributions and the factors to consider when deciding which one to use.
This provision could also have potential tax implications for plan sponsors. While pretax matching contributions are tax deductible as a business expense, Roth matching contributions may not be. Plan sponsors should work with their financial professional or tax advisor to ensure they’re making the most of their retirement plan’s tax benefits.
3 Roth catch-up contributions
What’s proposed—401(k) catch-up contributions (if offered) would have to be designated Roth contributions.
The purpose—This provision appears to be a revenue generator to help offset the cost of other SECURE Act 2.0 proposals.
Planning considerations—Plan sponsors who offer catch-up contributions but don’t currently offer Roth contributions would have to amend their plan documents to add them. All 401(k) sponsors may want to coordinate with their payroll provider or TPA to determine what the procedures would be for ensuring catch-up contributions are designated as Roth. Additionally, they may want to work with their financial professional, TPA, or recordkeeper to create education materials that would help participants nearing retirement understand the Roth rules.
4 Higher catch-up contribution limits for certain older workers
What’s proposed—Participants aged 62 to 64 would be able to make up to $10,000 in catch-up contributions (indexed for inflation) beginning in 2023 after maxing out their regular 401(k) contributions. As noted above, these contributions would have to be designated as Roth.2
The purpose—For 2022, participants who are aged 50 and older can make up to $6,500 in catch-up contributions. This proposed provision would enable workers aged 62 to 64 to save an additional $3,500 in the years leading up to their retirement, helping them retire with increased savings.
Planning considerations—Plan sponsors may want to coordinate with their payroll provider or TPA to determine what the procedures would be for participants aged 62 to 64 who want to make the higher catch-up contributions.
5 Student loan matching contributions
What’s proposed—Plan sponsors would be able to make matching contributions to an eligible employee’s 401(k) account based on the employee’s student loan payments.
The purpose—It’s no secret that student loan debt is hindering some workers’ ability to save for retirement, and many plan sponsors have been seeking a way to address this barrier. This provision would allow all plan sponsors to make matching contributions on student loan payments, which was previously approved by the IRS for one employer through a private letter ruling.
Planning considerations—Student loan matching contributions could be challenging to implement due to the new procedures that would be required. Policies for obtaining employee representations verifying their loan payments would be needed, as would procedures for sponsors, TPAs, and payroll providers to make the contributions. Plan sponsors who adopt this provision would want to create a communication strategy that, among other things, addresses the concerns of participants who don’t have student loans.
6 Reduced service requirement for long-term, part-time employees
What’s proposed—Long-term, part-time (LTPT) employees would be eligible to contribute to a 401(k) plan after two years.
The purpose—Under the SECURE Act, LTPT employees have to complete three years of service in order to be eligible. The one-year reduction means they’d be able to participate sooner and have an extra year to build their retirement savings.
Planning considerations—Plan sponsors who have LTPT employees may want to coordinate with their payroll provider, TPA, and recordkeeper to ensure their eligibility calculations and procedures are updated. This expedited participation for LTPT employees could also have plan design and cost implications. Sponsors might revisit whether they want to make matching or profit-sharing contributions for these participants.
7 Delayed RMDs
What's proposed—The age for required minimum distributions (RMDs) would gradually increase from 72 to 75.
The purpose—One of retirees’ greatest fears is running out of money. Raising the age for RMDs would give participants more flexibility when creating their deaccumulation strategy. It would also enable them to keep more of their money invested in their retirement plan or IRA for a longer period of time, should they so choose.
Planning considerations—TPAs and recordkeepers will need to update their distribution processing systems and procedures. Plan sponsors will want to revise their participant distribution education and communications to reflect the new RMD ages.
8 Increased tax credits for small businesses
What’s proposed—The credit for retirement plan start-up costs would increase from 50% to 100% for employers with 50 or fewer employees. An additional credit of up to $1,000 per employee would also be available based on the employer contributions made to the plan. This credit would be phased out for employers with 51 to 100 employees.
The purpose—Cost is one of the primary reasons many small business owners don’t offer a 401(k) plan. These credits help address this concern and may encourage employers to establish a plan to help their employees save for retirement.
Planning considerations—Small business owners may be more open to setting up a 401(k) plan once they learn about the credits, but they’ll want to crunch the numbers. Financial professionals and TPAs can help with this analysis, showing projected costs before and after the credits are applied. They can also provide assistance with plan design, administration, and investment selection, should an employer decide to move forward.
What happens next?
SECURE Act 2.0 has the potential to change the retirement landscape, but its passage this year may come down to timing and other congressional priorities. Congress’s August recess is only three months away, followed by the midterm elections. The bill still needs to pass the Senate, and any differences between the Senate and House versions would have to be resolved before going to the president for signature. There’s also a possibility that Congress could tack parts of SECURE Act 2.0 on to other must-pass legislation. Even with this uncertainty, it’s important to start planning now so you can hit the ground running should any of the proposed provisions become law.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
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