The Secure 2.0 Act has gained a lot of attention. It comes with tax credits and retirement benefits aimed to help employers and people in all stages of retirement savings. This act comes with ambitious proposals to pave the way for Americans to save for retirement with ease. With bipartisan support, it is expected to pass no later than 2022. This act has the potential to completely change the way people save for retirement.
To begin with, one of the most significant changes comes with how employees will enroll in employee-sponsored retirement plans. These plans, such as 401(k) or 403(b) plans, are currently opt-in plans. Typically, after an eligibility waiting period, it is up to the employee to initiate setting up a plan and choosing how much he or she contributes. The proposed legislation changes that. Instead, qualifying employees will be auto-enrolled into their employer-sponsored retirement accounts by the employer at a rate of 3%. The new act would also change the definition of a qualified employee. Part-time employees working a minimum of 500 hours/year for at least two consecutive years will now qualify. This is a reduction from the current qualifications of three years.
Employees can choose to opt-out of the plan or change the savings amount to suit their needs. But the policy aims to significantly increase retirement contributions. Current policies prohibit incentives for participating in a retirement plan, but the SECURE Act 2.0 could change that. Employees may be eligible to receive incentives, such as gift cards, from employers for participating in retirement savings.
There are some exceptions to these rules, however. Companies with fewer than 10 employees or have been open for less than three years are not required to auto-enroll their employees in retirement accounts. Retirement plans for churches and government agencies are also exempt.
The act would also offer savings options for college graduates who may not have retirement on their minds yet. Most college graduates prioritize paying off student loans over saving for retirement. As they put off retirement savings, this has the potential to put them behind on setting themselves up for their financial future. The new legislation has found a way for them to do both. Instead of employer contributions being based only on retirement accounts, they could make retirement contributions based on student loan payments. This provision would apply to 401(k), 403(b), 457(b), and SIMPLE IRA accounts, and could be effective as early as the 2022 plan year.
With limited funds, small businesses have always struggled to offer competitive benefits to their employees. The SECURE 2.0 Act looks to change that. The new bill offers tax credits to small businesses with 50 employees or fewer that offer retirement planning to workers. These credits would help them offset some of the plan start-up costs. This becomes a way to encourage small businesses not to overlook retirement planning as a business perk. Small businesses can also enjoy a three-year tax credit for joining a Multiple Employer Plan for retirement savings.
The SECURE 2.0 Act also takes a look at unfair family attribution rules as it relates to business owners. For states with community property laws, people who own businesses must automatically consider their spouse as owning half of all property obtained during the marriage. This can cause problems in the event of separation, even if the business was solely operated by one spouse. This act aims to remove this attribute, even if the business is operated in a community property state.
As life changes, so does information. Moving causes a change of address, changes in marital status may initiate a name change. When an employee creates a retirement account with a new employer, they may find it difficult to locate old retirement accounts, depending on their history. With the SECURE 2.0 Act, a national online database will allow employers to easily find old accounts to consolidate with new retirement accounts.
To ensure maximum savings, the SECURE 2.0 Act is proposing new catch-up contribution limits, as well. Currently, the total contribution limit for 401(k) and 403(b) accounts is $19,500. Current catch-up contribution limits for workers age 50+ years allows adding an extra $6,500. If the legislation passes, the SECURE Act 2.0 would create big changes for workers aged 62-64. They would be able to make catch-up contributions of up to $10,000. There is also a provision for IRA catch-up limits for 50+ beginning 2023 indexed to inflation.
As people approach retirement age, they need to start taking a close look at how much they have saved. They start to ask themselves, do I have enough, or could I benefit from saving a little longer? Traditionally, required minimum distributions (RMDs) began at 70 ½ years old. With the passing of the 2019 SECURE Act, that age went up to 72. The proposed SECURE Act 2.0 will change the age again, this time in steps. Starting in 2022, retirees can wait until age 73, in 2029 they can wait until they are 74, and by the year 2032, the last step raises the RMD to 75. This change benefits retirement savings because retirement savings can grow tax-free longer. However, by prolonging distributions, the withdrawal requirements may increase. The proposal also aims to greatly reduce the tax penalty from not taking out mandatory withdrawals from 50% to 25%.
With a benefit for everyone, the proposed SECURE 2.0 Act is expected to make a positive change in the way Americans save for retirement. There is also a proposal to allow 403(b) plans to invest in Collective Investment Trusts (CIT). A CIT operates similarly to a Mutual Fund, but is set up for retirement accounts only. Before this proposal, they have never been allowed for 403(b) accounts. Until it is passed, any provision is subject to change, so this legislation should be watched closely with anticipation.
About the Author:
Lyle Solomon has considerable litigation experience as well as substantial hands-on knowledge and expertise in legal analysis and writing. Since 2003, he has been a member of the State Bar of California. In 1998, he graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, and now serves as a principal attorney for the Oak View Law Group in California.
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