Congress recently passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, nicknamed SECURE Act 2.0. The bill, which has progressed to the Senate, aims to make several changes to retirement plans like the 401(k), including the following.
Automatic Enrollment
The SECURE Act 2.0 mandates that employers who establish defined contribution plans after 2021 must automatically enroll new employees who are qualified in the plan at a pretax contribution level of 3% of their wage. This amount would rise by 1% each year until it reached at least 10% but not more than 15% of the employee’s compensation. Employees might choose a different contribution if they so desired.
Small firms with fewer than ten employees, startup enterprises (those in existence for less than three years), church plans, and governmental plans are exempt.
Catch-Up Contributions Should Be Expanded And ‘Roth-Ified.’
Beginning in 2023, the SECURE Act 2.0 maintains the present catch-up contribution restrictions for individuals over 50 but increases the annual catch-up amount to $10,000 for participants ages 62 to 64. This higher ceiling would be adjusted for inflation as well.
Allow Roth contributions to be matched.
If plan sponsors allow, employees could choose to have some or all of their matching contributions recognized as Roth contributions in 401(k) plans. Employer matching contributions classified as Roth contributions are not taxable to employees.
Postpone Mandatory Distributions
The first SECURE Act increased the age at which plan participants must start taking mandated distributions to 72 years old. Beginning in 2022, SECURE Act 2.0 raises the mandatory minimum distribution age to 73, followed by 74 in 2029 and 75 in 2032.
Part-Time Workers’ Participation Expedited.
The SECURE Act 2.0 “would expedite the accession of long-term, part-time workers as eligible participants” by reducing the measuring period for eligibility from three to two years, beginning in 2021. As a result, “the first set of long-term, part-time workers would become eligible for elective deferral of the defined contribution plans starting from January 1, 2023.
Authorize Loan-to-Student Matching
The Act mandates that student loan repayment matching contributions be vested like other matching contributions like the 401(k). This would enable borrowers to save for retirement via tax-exempt employer contributions to their retirement accounts while simultaneously paying down their debt.
Additional Requirements
SECURE Act 2.0 would make the following modifications, among others:
- Create a centralized database to help Americans track down their misplaced retirement money.
- Expand options for self-correction, such as for participant loan errors and employee voluntary deferral failures.
- Require the Secretary of the Treasury to take steps to raise public awareness of the Retirement Savings Contributions Credit (commonly known as the saver’s credit), which is accessible to low- and moderate-income workers.
- Adding 403(b) retirement plans to the mix, some of the 401(k) plan’s design features.
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