The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 ushered in several important changes designed to make access to, and participation in, employer-sponsored retirement plans easier. It included several important changes such as repealing the maximum age for traditional IRA contributions, increasing the required minimum distribution age to 72, and allowing certain part-time employees to participate in 401k plans. Despite the success of the initial reforms, there is another parcel of legislation, Securing a Strong Retirement Act of 2021, (SECURE Act 2.0) that builds upon the original SECURE Act. This includes implementing a mandated automatic enrollment feature, permitting expanded catch-up contributions, accelerating part-time employee participation, and even allowing financial incentives to encourage participation. While the SECURE Act 2.0 is still under consideration in the House, it does enjoy bipartisan support in Congress. Despite this, the proposed changes provide important insight into the changes which may be required in the coming year. To help clients, prospects, and others, Hanson & Co has provided a summary of the key details below.
Key SECURE ACT 2.0 Provisions
- Mandated Automatic Enrollment – Under current regulations when a new retirement plan is set up, employers are not required to implement an automatic enrollment feature. This means the responsibility is left up to the employee to enroll in the plan and establish a contribution percentage when eligible. SECURE Act 2.0 would require any defined contribution plan established after 2021 would be required to automatically enroll qualifying employees and set the contribution level of 3% of compensation. The level would increase annually to at least 10%, however, employees will be able to make contribution level changes as desired. It is important to note there is an exception for small businesses with 10 or fewer employees.
- Expanded Catch Up Contributions – Currently, employees that are 50 years or older can make catch-up contributions to 401(k) or similar retirement plans. The limit on these contributions for this year is $6,500 and it is indexed annually for inflation. Under the SECURE Act 2.0, the existing catch-up contribution structure would remain, but there would be an increase in the amount of allowed catch-up contributions for participants between 62-64 years old, starting in 2023. The increased amount would provide an additional savings opportunity to those quickly approaching retirement.
- Accelerate Part-Time Employee Participation – The original SECURE Act made it possible for long-term part-time employees to participate and contribute to an employer’s 401k plan. The rule requires that an employee that has worked more than 1,000 hours in a single year, or 500 hours over 3 consecutive years, be allowed to participate. Under SECURE Act 2.0., the timeline would be accelerated by reducing the 500-hour requirement to occur over 2 years rather than 3. It is expected the change will make it easier to participate.
- Delay Required Distributions – Building on the changes which increased the age at which participants must take mandatory distributions to 72, SECURE Act 2.0 would again raise the age at which these distributions need to be taken. There would be a phased-in approach starting in 2022 when the age would be increased to 73, again increasing to 74 in 2029 and reaching 75 in 2032.
- New Incentive Programs – Currently employers are not permitted to provide any incentives to encourage employee participation in a company-sponsored retirement plan. However, SECURE Act 2.0 would change the rule allowing employers to offer certain financial incentives (such as gift cards) in small amounts to encourage employees to contribute to the plan.
- Student Loan Matching – Since many young workers do not focus on retirement savings due to the need to repay student loans, SECURE Act 2.0 would allow employers to make matching contributions based on student loan payments. It is important to note that matching must vest under the same schedule as other matching contributions.
- Plan Administration Changes – There are also several plan administration changes such as reduced disclosure requirements, expanding the IRS Employee Plans Compliance Resolution System, (EPCRS), and allow for necessary plan amendments to be adopted by the end of 2022 to facilitate plan changes.
It is clear the SECURE Act 2.0 would implement several retirement plan reforms affecting almost every Denver area family and business. If you have questions about the information outlined above or need assistance with your 2020 retirement plan audit, Hanson & CO can help. For additional information call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.