Coming Soon to a 401(k) Near You: SECURE 2.0
On May 5, 2021, the Ways and Means Committee in the U.S. House of Representatives showed a rare sign of bipartisanship by unanimously passing the Securing a Strong Retirement Act of 2021 – more commonly known as SECURE 2.0. The bill builds on a number of items that were included in the SECURE Act that passed in late 2019 and also includes many new retirement plan features. While a number of similar bills have been proposed since the original SECURE Act was passed, the fact that this bill unanimously passed committee is a good indicator that this one has legs.
The bill contains a number of provisions to encourage employees to save more, but it also contains a number of important revenue-raising changes (i.e. changes that accelerate taxation of retirement benefits). Below is a list of some important changes included in SECURE 2.0 that may make their way into law should the bill continue to progress so smoothly.
- Student Loan Repayments
SECURE 2.0 builds on the student loan relief that was included in the CARES Act in 2020 and more recently in the American Rescue Plan Act that passed earlier this year.
When employees make payments on student loans, SECURE 2.0 allows employers to treat those payments as if they were elective deferrals to the 401(k) plan and make “matching” contributions to the participant’s 401(k) account. Special nondiscrimination testing is permitted in the event too many non-highly compensated employees stop making traditional elective deferrals to the plan and instead make student loan payments.
The match would be permitted on “qualified student loan payments.” The student loan payments, plus actual elective deferrals to the 401(k) plan, cannot exceed the existing annual limit on deferrals ($19,500 in 2021), and student loan payments must be made for “qualified higher education expenses,” which is essentially the cost of attendance. Matching contributions for student loan payments must be made at the same rate as traditional elective deferrals, and the employees must otherwise be eligible to receive the match if they instead chose to make elective deferrals. Finally, the matching contributions for student loan payments must vest under the same schedule as other matching contributions.
- Expanding Automatic Enrollment
Automatic enrollment features would be required for new plans – any plans existing when the bill becomes law (if and when that may happen) would be grandfathered and not required to implement automatic enrollment. The automatic enrollment feature must be an EACA, meaning it would require permissible withdrawals by participants and be subject to the uniformity rule.
Each participant would initially be subject to a 3% automatic contribution, and that would increase by 1% each year up to at least 10%, but the employer could choose to increase the cap up to 15%. Of course, an employee could always affirmatively elect a different contribution. There are some exceptions for certain types of plans and employers.
- RMD Age Increases
The bill proposes to increase the age for required minimum distributions (“RMDs”) yet again. Recall that the original SECURE Act increased the RMD age from 70.5 to 72. SECURE 2.0 proposes to gradually increase the RMD age from 73-75 over the course of 2021-2032.
- Changes to Catch-Up Contributions
Currently, participants over the age of 50 are permitted to contribute elective deferrals in excess of the normal limit (in 2021, an extra $6,500). SECURE 2.0 increases the contribution limit to $10,000 for participants between age 62 and 65, and the limit would continue to be adjusted for cost of living changes. Additionally, catch-up contributions to IRAs would be indexed and increase with cost of living changes.
In a revenue-raising move, SECURE 2.0 requires all catch-up contributions to be designated Roth contributions – presumably to allow the government to reap the income tax benefits sooner than it otherwise would.
- Roth Matching Contributions
Participants would be given the opportunity to elect for employer matching contributions to be designated as Roth. While this may help participants in their tax planning strategy, this is also a revenue-raising mechanism (i.e. it requires taxation in the year of contribution rather than when the matching contributions are finally distributed likely years or decades later).
Again, this is just a small sample of the many changes included in SECURE 2.0. While this is not law yet, be on the lookout for this bill, or one very similar, to make its way to the full House, the Senate, and even the President’s desk by late summer or early fall 2021.
Lake Moore is an ERISA and employee benefits attorney who actively advises companies (large and small, public and private), administrators, accountants, tribal governments, and other lawyers on the compliance, administration, correction, and innovative design of a multitude of employee benefit plans.
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