How The Secure Act 2.0 Could Change Retirement Planning

The SECURE Act 2.0, officially called the Securing a Strong Retirement Act of 2021, was approved by the House Ways and Means Committee on May 5, 2021. The act is essentially a follow-up to the 2019 SECURE Act (Setting Every Community Up for Retirement Enhancement Act). The 2019 legislation was passed to enhance the long-term financial security of Americans by providing wider access to retirement savings.

The SECURE Act 2.0 will continue to improve saving opportunities for workers and make saving for retirement easier for employees of all ages. The legislation now moves to the full House for consideration with strong bipartisan support among both House and Senate membership. Although it is highly anticipated the bill will pass either this year or in 2022, it is likely that the provisions will be modified as the bill makes its way through Congress. While most proposed provisions of the legislation would apply to plan years beginning after December 31, 2022, certain provisions would apply after December 31, 2021.

1. Auto Enroll Employees into a Retirement Savings Plan

The legislation would require employers to automatically enroll new eligible workers into 401(k) or 403(b) plans unless workers take the initiative to opt out. New eligible employees would enroll at a savings rate of 3% of their salary and contribution rates would automatically increase each year by 1%, up to at least 10% but not more than 15% of the employee’s pay.

There is an exception for small businesses with 10 or fewer employees, new businesses which have been open for less than three years, church plans and governmental plans.

2. Change to Required Minimum Distribution (RMD) Rules

Under current law ushered in by the 2019 SECURE ACT, participants are required to begin taking distributions from their retirement plans at age 72. The proposed legislation would again raise the RMD age further to 73 starting on January 1, 2022; to 74 starting on January 1, 2029; and 75 starting on January 1, 2032. 

Additionally, the individual tax penalty for failing to take the RMD would be greatly reduced. Currently, if individuals do not take the full RMD, a 50% tax penalty is applied. New provisions would reduce the tax penalty to 25% and even further to 10% if corrected in a timely manner.

3. Raise the Catch-up Contribution Limits

The 2019 SECURE ACT permitted employees who are at least 50 years old to make catch-up contributions to their retirement accounts. The limit on catch-up contributions for 2021 is $6,500 to 401(k) and 403(b) plans after hitting this year’s $19,500 limit. Except in the case of SIMPLE IRA, for which the limit is $3,000.

The new proposal would also allow employees ages 62, 63, and 64 to contribute even more to retirement accounts. Beginning in 2023, these workers will be able to increase the annual catch-up amount an extra $10,000 for 401(k) and 403(b) plans, and an extra $5,000 for a SIMPLE IRA.

4. Roth Matching Contributions

Plan sponsors would have the option of permitting employees to elect that some or all their matching contributions be treated as Roth contributions for 401(k), 457(b), and 403(b) plans. An employer matching contribution that is designated Roth contribution would not be excludable from the employee’s gross income.   

5. Employer Matching Contributions Based on Student Loan Payments

The proposed bill makes progress toward addressing the growing student-loan debt issue in the United States. The legislation would allow workers to pay down a student loan instead of contributing to retirement accounts and still receive an employer match in their retirement plan based on their individual student loan payments. This would apply to 401(k) plans, 403(b) plans, SIMPLE IRAs and 457(b) plans. The provision is intended to assist employees who may not be able to save for retirement because they are prioritizing student debt and missing out on available matching contribution opportunities from their employers.

6. Expedite Part-Time Workers’ Retirement Plan Participation

The SECURE ACT expanded eligibility for long-term, part-time employees who work at least 500 hours a year for three consecutive years to contribute to their 401(k) plan. SECURE ACT 2.0 would reduce the three-year rule to two. As a result of shortening from three years to two years, the first group of long-term, part-time workers would become eligible for participation as of January 1, 2023.

7. Allows CITs in 403(b) Plans

Under current law, 403(b) plan investments are generally limited to annuity contracts and mutual funds, preventing participants from investing in collective investment trusts, which are often used by 401(a) plans due to their lower fees.

The proposed bill would allow 403(b) custodial accounts to invest in CITs if certain conditions are met. (1) the plan is subject to ERISA, (2) the plan sponsor accepts fiduciary responsibility for selecting the investment that participants can select under the plan, (3) the plan is a governmental plan, or (4) the plan has a separate exemption from the securities rules. These changes would increase the availability of low-cost collective investment trust options for retirement savers and conform to the securities law rules for 401(a) plans and 403(b) annuities.

8. Greater Flexibility in Correcting Plan Errors

Proposed provisions would allow plan sponsors more time to correct missed contributions to employees’ retirement account without penalties. Giving plan sponsors more flexibility expands the scope of the Employee Plans Compliance Resolution System (EPCRS), which allows plan sponsors to self-report errors to the IRS and correct those errors without drastic penalties.

Retirement plan sponsors and Wealth Management firms should take this opportunity to familiarize themselves with the bill’s provisions, put a strategy in place to assess the potential impact, and plan to implement necessary changes once the legislation becomes law by the end of the year.

Sia Partners has extensive experience delivering Retirement Solutions in the Wealth Management space and a strong understanding of the industry best practices to assist firms in their initiatives to comply with SECURE ACT 2.0 legislation.

Impact Assessment

• Identify all impacted functions by the legislation
• Conduct current state analysis
• Determine key gaps and enhancements

Target Operation Model

• Future state design and documentation
• Prioritize list of key initiatives/ enhancements
• Define implementation roadmap

Implementation

• Establish program governance
• Define business functional requirements, test execution, etc.
• Define and implement communication/ training strategy