- Expanding automatic enrollment in workplace retirement savings plans
- Increasing the age for Required Minimum Distributions to age 75 over ten years
- Allowing for higher catch-up limits for savers aged 62 to 64
- Allowing employers to treat repayment of student loans as elective deferrals for purposes of matching contributions
While this is potentially good news for Americans saving for and living in retirement, many questions remain as to how it will be paid for – and if the bill will be signed into law by President Biden. The higher catch-up provision, in particular, has raised eyebrows because Congress says it plans to pay for it by treating all catch-up contributions as Roth contributions – including catch-up contributions for persons over 50.
Congress has been pushing for years to make a portion of qualified retirement contributions be automatically directed into Roth accounts, which are funded with after-tax contributions, grow tax-deferred, and are withdrawn tax-free at retirement. In fact, when the Republicans were writing the original version of the 2017 Tax Cuts and Jobs Act, they specified that only $3,000–$5,000 of contributions would go into tax-deferred accounts and the rest would go into Roth accounts. This provision was referred to as “Rothification,” but was ultimately removed a few days before the final bill was introduced.
Congress hopes to change retirement contribution characterization because it wants the tax receipts to fall within a ten-year budgetary window to pay for their spending measures and tax cuts. As it works now, the money that American workers put into company retirement plans never factors into the US budget – even when participants retire and begin to withdraw their savings and pay tax on it.
So, is this new provision to force catch-up contributions into Roth accounts the first step toward Rothifcation? Are our legislators using this as a springboard to redirect more retirement plan contributions into Roth accounts? Only time will tell.
Stay Tuned for SECURE 2.0 Timing
Although the House Ways and Means Committee passing SECURE 2.0 is good news, it could be some time before it makes it to President Biden’s desk to be signed into law. First, the bill must be sent to the floor of the House of Representatives for a vote. The House could pass the bill on its own due to bipartisan support, but it is currently focused on Biden’s proposed $1.7 trillion infrastructure bill, so it is not an urgent priority.
Should the Democrats decide to pass the bill without Republican support, they will have to write and pass a budget in both the House and the Senate since reconciliation instructions are written into the budget resolution. This is likely to take the entire summer to complete, and given that Congress is on recess for the entire month of August, it is likely that SECURE 2.0 will not make it to the House floor for a vote until after Labor Day. As for the Senate, chances are it will put SECURE 2.0 into its year-end omnibus bill, which may pass in December.
The late passage of this bill would be a repeat scenario of the first SECURE bill, which was passed in December 2019 and went into effect January 1, 2020. Because of the short turnaround time, retirement plans had to quickly ramp up and alter plans to meet the new provisions. The same fire drill could happen again if SECURE 2.0 is eventually signed into law.
Regardless of if or when SECURE 2.0 happens, modernization of retirement savings plans is much needed. Below, you can read through the provisions of SECURE 2.0 in more detail. If you would like to view the bill in its entirety, click on the document title: The Securing a Strong Retirement Act of 2021.
Title I – Expanding Coverage and Increasing Retirement Savings
Section 101: Expanding automatic enrollment in 401(k) and 403(b) retirement plans upon becoming eligible (and the employees may opt out of coverage). The initial automatic enrollment amount is at least 3 percent but no more than 10 percent. Then, each year, that amount is increased by 1 percent until it reaches 10 percent. All current 401(k) and 403(b) plans are grandfathered. There is an exception for small businesses with 10 or fewer employees, new businesses (e.g., have been in business for less than 3 years), church plans, and governmental plans.
Section 102: Modification of credit for small employer pension plan startup costs. The three-year small business startup credit is currently 50% of administrative costs, up to an annual cap of $5,000. Section 102 makes changes to the credit by:
- Increasing the startup credit from 50% to 100% for employers with up to 50 employees.
- Except in the case of defined benefit plans, an additional credit would be provided.
Section 103: Directs the Internal Revenue Service to promote the Saver’s Credit to increase utilization.
Section 104: Enhancement of 403(b) plans to allow investing in collective investment trusts.
Section 105: Increases the age for required beginning date for mandatory distributions to 73 starting on January 1, 2022 – and increases the age further to 74 starting on January 1, 2029, and 75 starting on January 1, 2032.
Section 106: Indexing IRA catch-up limit.
Section 107: Higher catch-up limit to apply at age 62, 63 and 64 to $10,000 in retirement plans and $5,000 in SIMPLE IRAs.
Section 108: Allow for Multiple Employer 403(b) Plans.
Section 109: Treat repayment of student loan as elective deferrals for purposes of matching contributions.
Section 110: Application of credit for small employer pension plan startup costs to employers which join an existing plan (ensures the startup tax credit is available for three years for employers joining a MEP).
Section 111: Military spouse retirement plan eligibility credit for small employers.
Section 112: Small immediate financial incentives for contributing to a plan like gift cards in small amounts.
Section 113: Safe harbor for corrections of employee elective deferral failures; allowing for a grace period to correct, without penalty, reasonable errors in administering these automatic enrollment and automatic escalation features.
Section 114: One-year reduction in period of service requirement for long-term, part-time workers.
Section 115: Findings relating to S Corporation ESOPs.
Title II – Preservation of Income
Section 201: Remove required minimum distribution barriers for life annuities.
Section 202: Repealing the 25% limit on qualifying longevity annuity contracts.
Section 203: Insurance-dedicated exchange-traded funds.
Title III – Simplification and Clarification of Retirement Plan Rules
Section 301: Recovery of retirement plan overpayments.
Section 302: Reduction in excise tax on certain accumulations in qualified retirement plans.
Section 303: Performance benchmarks for asset allocation funds.
Section 304: Review and report to Congress relating to reporting and disclosure requirements.
Section 305: Eliminating unnecessary plan requirements related to unenrolled participants.
Section 306: Retirement savings lost and found.
Section 307: Expansion of Employee Plans Compliance Resolution System.
Section 308: Eliminate the “first day of the month” requirement for governmental section 457(b) plans.
Section 309: One-time election for qualified charitable distribution to split-interest entity.
Section 310: Distributions to firefighters to extend the age 50 rule to private sector firefighters.
Section 312: Individual retirement plan statute of limitations for excise tax on excess contributions and certain accumulations.
Section 313: Exclusion of certain disability-related first responder retirement payments.
Section 314: Separate application of top-heavy rules to defined contribution plans covering excludible employees.
Section 315: Repayment of qualified birth or adoption distribution (“QBAD”) limited to 3 years.
Section 316: Employer may rely on employee certifying that hardship distribution conditions are met.
Section 317: Penalty-free withdrawals from retirement plans for individuals in cases of domestic abuse.
Section 318: Reform of family attribution rule.
Section 319: Amendments to increase benefit accruals under plan for previous plan year allowed until employer tax return due date.
Section 320: Retroactive first-year elective deferrals for sole proprietors.
Section 321: Limiting cessation of IRA treatment to portion of account involved in a prohibited transaction.
Title IV – Technical Amendments
Title V – Administrative Provisions
Title VI – Revenue Provisions
Section 601: Would allow SIMPLE IRAs to accept Roth contributions.
Section 602: Hardship rules for 403(b) plans like the 401(k) rules.
Section 603: All catch-up contributions to qualified retirement plans are required to be Roth contributions effective January 1, 2022.
Section 604: Optional treatment of employer matching contributions as Roth contributions.
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