Two new pieces of proposed legislation are being considered by the U.S. Government regarding the Setting Every Community Up for Retirement Enhancement Act of 2019, which some are calling the “SECURE Act 2.0.” The House version, the Securing a Strong Retirement Act of 2021, was introduced on May 4, 2021. The Senate version, the Retirement Security and Savings Act of 2021, was introduced on May 20, 2021. While there are many similarities, differences do exist. The SECURE Act 2.0 is extensive and likely subject to change. Here are a few of the highlights that plan sponsors and participants should keep an eye on.
Treatment of Student Loan Payments as Elective Deferrals for Purposes of Matching Contributions
There is identical language in both the House version and the Senate version that states: Employer contributions made on behalf of employees for “qualified student loan payments” are treated as matching contributions if it meets certain requirements. This applies to 401(k)s, 403(b)s, Simple IRAs, and 457(b) plans. A plan may treat a qualified student loan payment as an elective deferral or an elective contribution for purposes of the matching contribution requirement under a basic safe harbor 401(k) plan, or an automatic enrollment safe harbor 401(k) plan, as well as for purposes of the Section 401(m) safe harbors. Employers are permitted to apply the actual deferral percentage (ADP) test separately, to employees who receive matching contributions on account of qualified student loan payments. This provision is scheduled to be effective for plan years beginning after December 31, 2021.
Expanding Automatic Enrollment in Retirement Plans
The House version expands automatic enrollment and automatic escalation in new 401(k) and 403(b) plans by requiring automatic enrollment with a minimum contribution rate of between 3% and 10%, with automatic escalation of 1% per year, up to a maximum of at least 10%, but no more than 15%. This provision would be effective for plan years beginning after December 31, 2022. The Senate version does not include this provision.
Military Spouse Retirement Plan Eligibility Credit for Small Employers
An interesting new provision of this law could benefit military spouses. The Secure Act 2.0 creates a new, nonrefundable income tax credit for eligible small employers that employ military spouses and allows them to participate in the employer’s defined contribution plan. The credit is $250 per employee, plus up to $250 for contributions made by the employer. This applies for up to three years.
Increase in Age for Required Beginning Date of Mandatory Distributions
Both the House and Senate versions contain increases in the required minimum distribution age from the current 72-years-old to a proposed 75-years-old. There is a slight difference between the two versions in that the House specifies incremental increases to age 73 beginning in 2022, 74 beginning in 2029, and 75 beginning in 2032. The Senate increases the age to 75 in 2032 without the incremental steps.
Higher Catch-up Limits
Currently, employees that are age 50 and older, are eligible to make a “catch up” contribution to their 401(k). The limit for 2021 was $6,500. However, under the House’s proposal, workers between 62- and 64-years-old would be able to contribute an additional $3,500 which would increase the catch-up contribution limit $10,000 above the $19,500 for each of those three years. The Senate text would simply lift the additional catch-up contribution limit to the $10,000 limit at age 60.
Exception From Required Distributions Where Aggregate Retirement Savings Do Not Exceed $100,000
Finally, another provision found only in the Senate version states that employees with less than $100,000 in their eligible retirement accounts in aggregate are not required to take required minimum distributions during their lifetime. This does not apply to defined benefit plans. The provision would be effective for initial measurement dates on or after December 31, 2021.
Retirement packages are becoming an essential component for employers to attract and retain employees. It is important to understand the proposed provisions and what impacts it may have on your plan. When implementing a retirement plan, seek the advice from a Fiduciary.
Tamara L Jemison
Retirement Plan Specialist