SECURE 2.0 Corrections Drafted by Congress

Members of the House of Representatives and the Senate Thursday issued a “discussion draft” for the much-anticipated bill applying technical corrections to the SECURE 2.0 Act of 2022.

Restoring Catch-Ups

The bill would make corrections to several mistakes made in the hallmark retirement law. First and foremost, it corrects the most egregious error of SECURE 2.0: accidentally removing catch-up contributions, starting in 2024. The drafters of SECURE 2.0 originally intended to create a higher catch-up limit for those aged 60 to 63, sometimes called super-catch-ups, and in the rush to pass a budget in December 2022, they made this now-infamous error. The corrections bill would make the original intent effective without removing catch-up contributions.

In light of their original intent, the IRS announced in August it will permit catch-up contributions to be made into 2024, even though SECURE 2.0 technically removes the concept from the code. This means catch-ups would be safe, even if the corrections bill is passed after December 31.

Though not a technical error, strictly speaking, and more an error in judgment, the IRS announced in the same guidance that it would extend to January 1, 2026, from January 1, 2024, the effective date for employees making $145,000 or more to make catch-up contribution on a Roth, or after-tax, basis. The corrections bill does not speak to this issue, presumably because the IRS has already addressed it through guidance.

Matching Starter 401(k) Limits to IRAs

The corrections bill would also explicitly tie the maximum contribution amount for Starter 401(k) plans to the annual maximum for individual retirement accounts. SECURE 2.0 previously set the maximum for Starter plans at $6,000 indexed, which was the IRA limit in 2022, but that provision was not set to take effect until 2024, when the IRA limit is set to become $7,000, effectively making the Starter limit both less than and divorced from the IRA limit. The correction effectively says that the Starter limit will match the IRA limit.

Additionally, the provision in SECURE 2.0 changing required mandatory distributions would also be corrected to reflect the intent of the drafters, which was to increase the age to 73 starting on January 1, 2023, and age 75 starting on January 1, 2033.

Further, the legislation would change the effective date for the 15% ceiling on automatic escalation found in Section 101 of SECURE 2.0. Plans started since SECURE 2.0’s passage must adopt auto-enrollment at 3% to 10%, then escalate by 1% to an end range between 10% and 15%, unless the participant elects otherwise. The corrections bill would move the date for the 15% ceiling on escalation to January 1, 2026, instead of 2025, leaving the ceiling at 10% in the meantime.

Other provisions in SECURE 2.0 received minor clerical corrections, including the Saver’s Match and plan lost and found.

Timing Dependent on Budget—Again

Michael Kreps, a principal in and chair of Groom Law Group’s retirement services group, says, “There was some hope from industry that there would be a more comprehensive ‘fix-it’ package, but there does not appear to be an appetite on Capitol Hill to relitigate substantive issues.”

Substantive issues, such as the decision to permit 403(b) plans to use collective investment trusts, are not part of the bill because their omission was not technical in character. The Retirement Fairness for Charities and Educational Institutions Act would address it, but no action has been taken since it passed the House Committee on Financial Services in May.

Assuming the corrections bill is attached to a budget bill, it will have two opportunities to pass, given the staggered nature of the expirations of the November continuing resolutions that extended federal spending to January 19 and February 2.