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Changes may soon be coming to your 401(k).
The Securing a Strong Retirement Act of 2022 — also known as SECURE 2.0 — was passed by the U.S. House of Representatives in March 2022. The bill (H.R. 2954) seeks to increase retirement savings, while simplifying and clarifying retirement plan rules.
Plan sponsors should discuss this proposed legislation with service providers and retirement advisors and monitor the bill as it progresses to adequately plan for the potential impact of these provisions on retirement plans.
The bill includes several noteworthy provisions, which are noted below.
SECURE 2.0 would require most new plans to automatically enroll participants with a minimum pre-tax deferral election of 3%, but not exceeding 10%. The automatic enrollment would increase by 1 percentage point to a minimum of 10%, but not exceeding 15%, on the first day of each plan year — after the participant completes one year of service.
Participants would be able to opt-out of plan participation, and the provision would go into effect for plan years beginning after December 31, 2023.
The 2019 SECURE Act put provisions in place for part-time workers with three consecutive years of service of at least 500 hours to become eligible for participation in retirement plans. SECURE 2.0 would reduce the three-year requirement to two years.
The provision would apply to plan years beginning after December 31, 2022, except for the provision related to pre-2021 service, which would be applied retroactively as if it had been included in the 2019 SECURE Act.
SECURE 2.0 would raise the age of the required minimum distribution to 75 years old in 2033. The provision would begin to impact individuals who turn 72 after December 31, 2022, on a staggered basis until 2033.
The catch-up limit for participants over the age of 50 would be increased from the current $6,500 to $10,000 for participants who turn 62 to 64 years old before the close of the plan year. The catch-up limits would also be indexed and increased for cost-of-living adjustments.
Only Roth accounts can receive catch-up contributions. These amendments would go into effect for years beginning after December 31, 2023.
Payments made by employees for qualified student loans may be considered as elective deferrals for the purposes of employer matching contributions— subject to the employee certifying that the payments were indeed made on such loans.
The contributions would be subject to vesting and other requirements. This amendment would apply to contributions made for plan years beginning after December 31, 2022.
An online, searchable database known as the Retirement Savings Lost and Found would be established where individuals can search for information to locate the plan administrator of any plans where the individual was a participant or beneficiary.
Its purpose is to allow the individual to locate plans to recover any benefit owed to them under the plan, and the database is to be created no later than two years after enactment.
The Employee Plans Compliance Resolution System (EPCRS) would be expanded to allow self-correction of errors for participant loans and employee elective deferrals.
This provision would be effective following enactment.
Currently, employer matching contributions are pre-tax, but this draft legislation would give employees the option to designate that some or all of their employer matching contributions be treated as Roth contributions.
Employer Roth contributions would be included in employees’ taxable income. This change would apply to tax years beginning after December 31, 2022.
The U.S. Senate is now considering its own version of the SECURE 2.0 Act. If passed, it will reconcile both versions of the draft legislation before sending it on to U.S. President Joe Biden for his signature and implementation.
Plan sponsors should start planning now for any changes that may result from the enactment of this legislation.
If you have any questions about the information above, please contact your E. Cohen advisor.
