After the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in late 2019, many in the retirement plan industry expected that further legislation was to come.
A bill nicknamed the “SECURE Act 2.0” is already in the works, and while it will likely undergo many changes until it emerges in its final form, policies like this tend to have bipartisan support, as lawmakers prioritize retirement laws and helping their constituents set themselves up for their future. The bill includes many provisions that could affect plan sponsors.
Taking up where the SECURE Act left off, the new bill, called the Securing a Strong Retirement Act of 2020, was introduced in October. It takes into consideration the economic struggles people have experienced during the pandemic; unsurprisingly, contributions to retirement plans lessened and, in some cases, dropped completely last year. The new bill aims to alleviate what lawmakers believe was an ongoing crisis for those saving for retirement, which was further exacerbated by the financial beatdown that COVID-19 served to people individually and to the economy as a whole. It seeks to make it easier for workers to save for retirement by helping them begin earlier without undue financial stress, while also making provisions for those who are nearing retirement age. Here are some of the key points in the bill as it looks right now:
Finally, help with student loans: The bill would allow those with student loans to make payments toward their loans in place of contributions to their defined contribution (DC) plans and still receive an employer match. This way, workers would be paying off debt while saving for retirement at the same time, rather than having to choose how to stretch their dollars.
Automatic enrollment: To make it simpler for workers to start saving for retirement, the bill would require auto-enrollment for participants in new DC plans. This would mean an initial contribution rate of at least 3%, which would increase automatically by 1% annually until reaching 10%.
Required minimum distributions (RMDs): Individuals with retirement account balances of $100,000 or less would have exemptions from the RMD requirement.
Higher age for RMDs: Building on the higher RMD age of 72 that was established in the SECURE Act, the bill would again raise the RMD age to 75 for DC plans and individual retirement accounts (IRAs). This allows savings to grow longer, meaning there is more money available once withdrawals must begin.
Increased catch-up contributions: The bill would increase limits on catch-up contributions for those who are making extra deferrals as they draw closer to retirement. This would affect workers who are 60 or older, and the new limits would be $10,000 for 401(k) and 403(b) plans (up from $6,500) and $5,000 for participants in SIMPLE [savings incentive match plan for employees] IRAs (up from $3,000). This allows older investors to contribute more pre-tax dollars to help them be more aggressive in preparing for a quickly approaching retirement.
Credit for establishing a retirement plan: To encourage small businesses to establish retirement plans, the bill would offer a new credit which would offset up to $1,000 of employer contributions per employee. The credit would be offered to businesses with 100 or fewer employees and would phase out over five years.
CITs in 403(b)s: To help them reduce costs, 403(b) plans would be allowed to invest in collective investment trusts (CITs).
Helping participants keep/find their savings: There are several provisions to protect individuals saving for retirement while looking out for their financial well-being, including protecting retirees who receive plan overpayments or taxpayers who have made accidental errors in managing their IRAs from fees and other penalties, as well as the creation of a national online database of lost accounts to help employees find savings held at businesses at which they’re no longer employed.
More credit for middle-income workers: In addition to increasing public awareness of the Saver’s Credit, the new legislation aims to improve it as well. This tax credit exists specifically to help low- and moderate-income workers by offering them a credit of between 10% and 50% of their saved retirement amount, depending on income level. The new bill would establish a single 50% credit, raise the maximum income amount a worker can make while still qualifying, and increase the credit’s maximum from $1,000 to $1,500.
Increase in qualified charitable distributions (QCDs): The bill would increase the annual limit on QCDs. These are distributions from an IRA that go directly to a charitable organization, and they count toward RMDs. If an individual doesn’t need the RMD, he can avoid paying taxes on it by giving it to charity. The annual limit would increase from $100,000 to $130,000 annually.
As with the original SECURE Act, SECURE 2.0 has bipartisan interest and support, so it’s very likely that it will be signed into law, with some adjustments, early this year. Plan sponsors should be prepared for these changes to retirement law and discuss them with an experienced financial adviser.
Syed Nishat is a partner at Wall Street Alliance Group. He holds a bachelor’s degree in business administration from University of Nevada Reno. Syed holds the FINRA Series 7, FINRA Series 63 and FINRA Series 66 licenses, along with licenses for life, disability and long-term care insurance. He also has been awarded the Behavioral Financial Advisor (BFA) designation.
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