Unpacking SECURE Act 2.0
In late March, Congress took its most significant step yet toward the passage of “SECURE Act 2.0”. The House passed the “Securing a Strong Retirement Act of 2022” in a 414-5 vote, which sets up a process through which the Senate will reconcile retirement-related bills currently in committee and negotiate with the House on potential final legislation. This month’s newsletter includes a brief summary of the path forward for SECURE Act 2.0 and identifies the Act’s provisions most likely to have the widest impact.
Background. In December of 2019 – seemingly a decade ago, before the COVID-19 pandemic struck – Congress passed the “Setting Every Community Up for Retirement Enhancement Act”, which we commonly reference as the SECURE Act. At that time, the SECURE Act was lauded as the most significant retirement plan-related legislation since 2006. And although the commonly used acronym is clever, the SECURE Act’s primary aims are implicit in its formal name: Congress sought to increase access to employer-sponsored retirement plans and to promote the availability of lifetime income intended to provide for a more secure retirement.
SECURE Act 2.0. Members of Congress have advanced many retirement packages on the heels of the original SECURE Act. The bill recently passed by the House would build on the SECURE Act’s focus around greater retirement plan availability and participation, as well as greater access to in-plan guaranteed income. We anticipate the following provisions to be most relevant:
- Matching Student Loan Repayments: Employers would have the option to match a participant’s higher education student loan payments as if they were salary deferrals to the qualified plan.
- Expanded Access for Part-Time Employees: The SECURE Act will require an employer to permit part-time employees to make elective deferrals following their attainment of age 21 and being credited with at least 500 hours of service in three consecutive years (starting in 2021 or later). Version 2.0 would reduce that requirement to two consecutive years.
- New Plans: Mandated Automatic Enrollment & Automatic Escalation: Beginning in 2024, new plans (including existing plans joining a MEP) would be required to apply automatic enrollment and automatic escalation, subject to exceptions for small employers, new organizations, and government and church plans.
- Later RMDs: Participants’ Required Beginning Date for Required Minimum Distributions (RMDs) would be further pushed back from an age 72 reference date to age 73 (2023), age 74 (2030), and age 75 (2033). This would continue the initial SECURE Act’s approach, which implemented a delay from 70 1/2 to 72.
- Simpler Hardship Procedures: Participants would be able to self-certify the hardship required to trigger eligibility for a hardship distribution.
- Expanded Access to CITs: Beginning in 2023, fiduciaries of 403(b) plans with custodial accounts would be permitted to offer investment options structured as collective investment trusts (CITs).
- Larger Catch-Up Contributions: Participants who had reached age 62 but not yet 65 could make larger catch-up contributions, up to $10,000 annually beginning in 2024.
- Larger Small Account Cash-Outs: The small mandatory cash-out limit would increase from $5,000 to $7,000 beginning in 2023.
- Expanded Roth Capabilities: Beginning in 2023, catch-up contributions would be required to be Roth contributions. (Side note: we expect much conversation on this topic given the challenges of applying the five-year Roth clock to older participants and payroll limitations some employers still face.) Employers could permit participants to elect to have some or all of their matching contributions made as Roth contributions. In addition, SIMPLE and SEP plan participants could begin to make Roth contributions.
- Expanded Access to Lifetime Income: Participants could receive the option of selecting annuities with certain increasing or accelerated payments without running afoul of the RMD rules.
What Happens Next? The House’s passage of SECURE Act 2.0 is much more noteworthy than the many proposals that are merely floated by members of Congress or introduced in bills that don’t make it to the House floor. Thus, we should see the recent vote as an encouraging sign.
We should also be aware that much work lies ahead. The House passed the original SECURE Act by a 417-3 vote in May of 2019. Yet it wasn’t passed in both houses and signed into law until December of 2019, and by that time the final version and political pressures had changed to the point that the final legislative package including the SECURE Act passed the House by a less decisive 297-120 margin.
With history as a guide, we anticipate that SECURE Act 2.0 will provide the foundation for an eventual package of retirement-related reforms and enhancements that will (a) be further modified over the next eight months, (b) experience an on-again-off-again ride toward passage, and (c) be attached to some larger bill before it becomes law. If you’d like to hear more about that upcoming path, join Fred Reish and our other presenters at the Qualified Plan Fiduciary Summit on April 19.