Tax Strategy: The House passes SECURE 2.0

April 22, 2022 9:00 AM

Almost since the enactment of the SECURE Act in December 2019 as part of the Consolidated Appropriations Act, 2020, Congress has been working on further refinements to enhance retirement saving efforts. At last, more than two years after enactment of the SECURE Act, the House passed the Securing a Strong Retirement Act of 2022 (SECURE 2.0) on March 29, 2022, by a vote of 414-5, reflecting strong bipartisan support.

That bipartisan support also exists in the Senate, although some further tinkering with the provisions is generally expected, which is likely to further delay final enactment. The changes are almost all favorable to plan administrators and participants.

Although much discussed, the House-passed version does not include the elimination of Roth conversions. It remains to be seen how long it will take the Senate to act on the legislation and what changes the Senate might make when they do take up the legislation.

Required minimum distributions

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One of the provisions that has been in the proposal from the start is a further extension of the required beginning date for minimum distributions. The SECURE Act extended the age from 70 ½ to 72. This legislation would further extend the age to 73 beginning in 2023, age 74 in 2030, and age 75 in 2033. The legislation would also reduce the penalty for failure to take RMDs from 50% to 25% after 2022.

Automatic enrollment

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Although employers have been permitted to have automatic enrollment provisions in retirement plans for several years, the proposed legislation would make automatic enrollment mandatory for 401(k) and 403(b) plans established after enactment of SECURE 2.0 and after 2023. The automatic enrollment requirement starts at no less than 3% of salary and no more than 10%. The percentage increases by one percentage point each year up to a maximum of 10%. Employees are permitted to opt out of automatic enrollment. Plans exempt from automatic enrollment include businesses with ten or fewer employees, businesses in business less than three years, church plans, and government plans.

Catch-up contributions

Under SECURE 2.0, beginning after 2023, employees ages 62, 63 or 64 would be entitled to $10,000 per year in catch-up contributions ($5,000 for SIMPLE plans), subject to inflation adjustments. Beginning after 2022, all catch-up contributions (other than contributions made to SEPs and SIMPLE IRAs) are treated as Roth contributions. SIMPLE IRAs and SEP IRAs would be able to accept Roth contributions after 2022.

Small employer credit

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The small employer credit for start-up plan expenses would be enhanced under SECURE 2.0. The credit is extended to five years if the business has 50 or fewer employees, and the credit is increased from 50% to 100% for those same businesses, capping at $1,000 per employee. The credit phases out between 51 and 100 employees and the percentage drops incrementally to 25% in the fifth year. The credit is also available retroactively to small employers in multiple employer plans already in existence for tax years beginning after 2019. SECURE 2.0 would also provide a credit for small employers who make military spouses immediately available to participate in retirement plans. 403(b) plans would also be able to participate in multiple employer plans.

Saver’s Credit

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After 2026, SECURE 2.0 would replace the various percentages under the Saver’s Credit with a unified 50% credit, subject to an income phase-out.

Annuities

SECURE 2.0 would eliminate the RMD actuarial test that limits use of certain annuities, and it would remove barriers to qualified longevity annuity contracts after enactment.

Hardship rules

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Under SECURE 2.0, employers would be permitted to rely on employee self-certification that a hardship had been incurred. Also, the 403(b) hardship rules would be conformed to the 401(k) rules.

Roth matching contributions

SECURE 2.0 would allow participants to treat matching contributions to defined contribution plans as Roth contributions.

Student loan payments

The legislation would allow employers to make matching contributions to 401(k) and 403(b) plans for employee student loan payments after 2022.

Contribution incentives

The legislation would allow employers to give employees de minimis low-cost incentives to encourage employee contributions.

Plan corrections

The legislation would allow a waiver of penalty fees if, among other requirements, certain errors are corrected within 9 ½ months after the last day of the plan year in which the errors are made.

Notice requirements

SECURE 2.0 would eliminate certain notice requirements to non-participants except for annual notices of participation requirements after 2022. It would also add a requirement for annual paper statements to 401(k) plan participants and every three years to pension plan participants.

Part-time employees

The three-year part-time employee length-of-service requirement established in the SECURE Act would be reduced to two years.

Retiree overpayments

Within certain limits, fiduciaries would not be required to recoup overpayments to retirees. Fiduciaries would also be prohibited from recouping overpayments that are at least three-years-old made due to fiduciary error and from imposing interest when recoupments are sought.

457(b) first-day-of-month requirement

SECURE 2.0 would eliminate the “first day of month” requirement for changes to 457(b) plans, effective after enactment.

Cash-out threshold

SECURE 2.0 would increase the mandatory cash-out threshold from $5,000 to $7,000 after 2022.

Collective investment trusts

After 2022, 401(b) plans would be permitted to invest in collective investment trusts.