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5 FAQs: Securing a Strong Retirement Act of 2022, SECURE 2.0

April 25, 2022

Wondering what changes are ahead for retirees? The SECURE Act 2.0 proposes several changes, including increasing the age for RMDs, enhancing catch-up contributions and more. Read on.

Did you read our blog, SECURE 2.0 Bill Set to Expand 401k Benefits? You’ll want to check it out for valuable information on retirement changes that could be on the horizon. PBN recently caught up with Craig Dumas to hear his thoughts on these proposed changes—check them out below.

What is the SECURE Act 2.0?

The Securing a Strong Retirement Act of 2022, or the SECURE Act 2.0, expands upon the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which was passed in 2019. The goal of this proposed legislation is to help people better prepare for retirement by giving them increased access to retirement funds and allowing them to save more toward retirement.

What are the biggest things that retirees or those planning for retirement should be aware of?

  • An increase in the age for required minimum distributions: The age to begin taking RMDs from retirement accounts such as 401(k)s, 403(b)s, IRAs, etc., would be raised gradually from age 72 to 75. For a person who turns age 72 after Dec. 31, 2021, and age 73 before Jan. 1, 2029, the age increases to 73. For a person who turns age 73 after Dec. 31, 2028, and age 74 before Jan. 1, 2032, the age increases to 74. Lastly, for a person who turns age 74 after Dec. 31, 2031, the age increases to 75. The catch-up contribution for SIMPLE IRAs will increase to $5,000, up from the current amount of $3,500. Accounts with $100,000 or less would be exempt from RMDs. The annual limit that can be given to charity as a qualified charitable distribution would be $130,000.
  • Enhancement to the catch-up provision: Under the current law, the catch-up contribution for participants aged 50 and older is $6,500. The proposed bill would increase this to $10,000 for workers who are 62-64. It would also mandate that all catch-up contributions be made as Roth (after-tax) contributions. The catch-up amount for individual retirement accounts (IRAs) is currently $1,000 for individuals age 50 and over but the SECURE Act 2.0 indexes this limit for inflation starting in 2023.
  • Student loan payments count as elective deferrals: Workers with outstanding student loans may be unable to contribute to a retirement plan while they are repaying their loans. This can cause them to miss out on valuable employer matching contributions. Under the new legislation, a worker’s student loan payments would be counted as elective deferrals for matching purposes, making them eligible to receive an employer matching contribution based on their loan payments, subject to the plan matching formula.
  • Saver’s Tax Credit: The phase-out limits of the Saver’s Tax Credit is removed so all employees under the income cap would get a 50% tax credit up to a max of $1,500 per year.
  • Online lost-and-found for long-forgotten pension benefits: Often, employees who change jobs leave their retirement plans behind and lose track of their money. This provision would create a national “lost-and-found” to help people find the money that belongs to them.

What are the biggest things employers should be aware of?

  • Automatic enrollment: 401(k) and 403(b) plans would be required to have automatic enrollment for eligible employees. The minimum contribution would start at 3% and cap out at 10%. The contribution percentage would increase automatically by 1% each year. Employees can choose a different contribution percentage or opt out of the retirement plan.
  • Increased tax credits for small business: As a way to encourage employers with less than 100 employees to set up a retirement plan, the business can receive a tax credit of up to 100% of the plan administration fees up to $5,000/year for the first three years. Employers may also be eligible for a tax credit with a defined contribution plan if they make military spouses eligible to participate within two months of hire, make military spouses eligible for any matching or nonelective contributions upon plan eligibility, and offer 100% vesting for military spouses in all employer contributions.
  • Safe harbor for corrections of employee deferral failures: Currently, employers may be subject to penalties if they do not correctly administer automatic enrollment and increases. However, under the proposed bill, penalties may be waived if the administrative errors are corrected within 9½ months after the last day of the plan year in which the errors were made. This would be effective as of the date of enactment.
  • Roth contributions: SIMPLE IRA plans will now be able to accept Roth contributions. Unlike 401(k) and 403(b) plans, Roth contributions (after-tax) are not allowed under the current law. This proposed change may be especially beneficial for younger employees. For SEP IRAs, employees would have the option to have the employee and employer contributions treated as after-tax (Roth) contributions in whole or in part.
  • Part-time employees: The workforce includes more part-time workers than ever before. Under the new bill, employees who work two consecutive years and complete at least 500 hours of service in each year would be eligible to participate in an employer-sponsored retirement plan.

How, if at all, will this impact prevalence and worker participation in defined employer contribution plans such as 401(k) and 403(b)?

The Secure Act 2.0 will go further in helping employers overcome some of the challenges they face with offering and maintaining a retirement plan for their employees.

Although the onus is being largely placed on employers to make it easier for workers to invest in their own financial futures, workers will be incentivized more than ever to participate in an employer-sponsored retirement plan to help them have a more secure retirement.

How can businesses and individuals start planning now in anticipation of these changes?

Business owners should reach out to their plan administrators or financial advisers to discuss the proposed changes. Individuals should also meet with their financial advisers to see how any of these changes may affect them and how they can best take advantage of them.

Questions? Contact us.

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