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 easily save for retirement. 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 employer-sponsored retirement plans. These plans, such as 401(k) or 403(b), 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 at least 500 hours/year for at least two consecutive years will qualify. This is a reduction from the current qualifications of three years.
New Legislation Helps College Graduates Build Retirement Savings While Paying Off Student Loans
Employees can opt out of the plan or change the savings amount to suit their needs. However, 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 employer incentives, such as gift cards, to participate in retirement savings.
There are some exceptions to these rules, however. Companies with fewer than 10 employees or 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 can put them behind in setting themselves up for their financial future. The new legislation has found a way for them to do both. Instead of employer contributions 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.
Empowering Small Businesses with Tax Credits and Simplified Retirement Solutions
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 provide 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 examines unfair family attribution rules concerning business owners. For states with community property laws, people who own businesses must automatically consider their spouse owning half of all property obtained during the marriage. This can cause problems in the event of separation, even if the company 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, and changes in marital status may initiate a name change. Employees who create a retirement account with a new employer 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.
Boosting Retirement Savings with Higher Contributions and Flexible Withdrawals
To ensure maximum savings, the SECURE 2.0 Act also proposes new catch-up contribution limits. The total contribution limit for 401(k) and 403(b) accounts is $19,500. Current catch-up contribution limits for workers age 50+ years allow 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. A provision for IRA catch-up limits for 50+ beginning 2023 is also indexed to inflation.
As people approach retirement age, they need to closely examine how much they have saved. They ask themselves, do I have enough, or could I benefit from keeping 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 in steps. Starting in 2022, retirees can wait until age 73, in 2029 they can wait until they are 74, and by 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 for not taking out mandatory withdrawals from 50% to 25%.
With a benefit for everyone, the proposed SECURE 2.0 Act is expected to positively change how 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 only set up for retirement accounts. Before this proposal, they were never allowed for 403(b) accounts.
About the Author:
Lyle Solomon has considerable litigation experience, 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. He is now a principal attorney for the Oak View Law Group in California.