‘SECURE 2.0’ would further expand retirement savings options

An eventual extension to 75 as the age by which retirees must withdraw required minimum distributions (RMDs) from requirement accounts and automatic enrollment of workers in employer plans are among the many ways a bill that has passed the House would expand coverage and use of tax-favored retirement savings.

The Securing a Strong Retirement Act, H.R. 2954, has been called "SECURE 2.0" because it builds upon the similarly broad reforms of the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, P.L. 116-94. For example, the SECURE Act increased the RMD beginning age to its current 72 from the previous 70½, which the latest legislation would further increase.

The Securing a Strong Retirement Act passed the House on Tuesday evening by a 414–5 vote, with 198 Republicans joining 216 Democrats voting for it. Next, it will be taken up in the Senate, where related bills have been under consideration by the Finance Committee.

Automatic enrollment of employees in employer plans has long been advocated as needed to increase retirement savings among workers. Accordingly, the bill would require Secs. 401(k) and 403(b) plans maintained by most employers and multiple-employer plans to automatically enroll eligible participants, beginning with plan years after Dec. 31, 2023.

Employees would be permitted to choose a contribution level of between 3% and 10% of compensation initially or opt out entirely. The initial percentage would escalate by a percentage point each year to 10% of compensation. Exceptions would be available for employers with fewer than 10 employees, those that have been in business for less than three years, and church and governmental plans. Other of the bill's provisions intended to expand coverage and increase retirement savings include:

• The small employer pension plan startup costs credit is increased from an applicable percentage of 50% of administrative costs to 100% for employers with up to 50 employees and eligibility lengthened from three years to five (with a decreasing applicable percentage in the third, fourth, and fifth years).
• The Sec. 25B credit for qualified retirement savings contributions, known as the saver's credit, would have a flat limitation of 50% of qualified retirement savings contributions of an eligible individual, rather than its current range of applicable percentages from 50% to 10% (and phasing out entirely) based on adjusted gross income and filing status. A new, higher phaseout range would be included.
• The RMD starting age would increase to 73 as of the beginning of 2023, 74 in 2030, and 75 beginning in 2033.
• The limit on catch-up contributions to an individual retirement account (IRA) by individuals age 50 and over, currently set by statute at $1,000, would be indexed for inflation after 2023. A separate catch-up amount for retirement plans of $6,500 ($3,000 for SIMPLE plans) would be increased to $10,000 (and $5,000 for SIMPLE plans) for participants ages 62 through 64.
• Sec. 403(b) plans would be allowed to participate in multiple-employer plans.
• Employers that make matching contributions under a 401(k), 403(b), or 457(b) plan or SIMPLE IRA could do so with respect to qualified student loan payments made by the employee.
• Where the SECURE Act required employers to offer 401(k) plan participation to certain long-term, part-time employees, the bill would widen eligibility by reducing the number of years that the employee must first serve (with at least 500 hours) from three to two (or, as under SECURE, by completing 1,000 hours of service in one year). 

The Securing a Strong Retirement Act also includes a range of provisions aimed at helping retirees make sure they do not outlive their retirement funds by facilitating funds' augmentation or preservation in various ways, including:

• Repealing the 25% limit with respect to qualifying longevity annuity contracts (QLACs) purchased or received in an exchange, which had limited their exemption from RMDs. The bill also would facilitate sales of QLACs with spousal survival rights.
• Directing Treasury to update regulations to clarify that exchange-traded funds may be made available through individual variable annuities.

Still other provisions would simplify and clarify retirement plan rules and provide relief in certain situations, including:

• Reducing the penalty for failure to take RMDs from 50% to 25% and providing for a further reduction to 10% with respect to a failure that is corrected in a timely manner, as defined in the bill.
• Establishing a "retirement savings lost and found" national online database to enable retirement savers who may have lost track of an employer plan or pension to find the plan administrator. The database is to be created no later than two years after enactment.
• Allowing a one-time election for a qualified charitable distribution from an IRA to be made to a split-interest entity. The distribution of up to $50,000 could be made to a charitable gift annuity, charitable remainder unitrust, or charitable remainder annuity trust. The bill would also index for inflation the $100,000 annual limitation on qualified charitable distributions.
• Amending the SECURE Act's recontribution allowance for qualified birth or adoption distributions by limiting the recontribution period to three years, consistent with Sec. 6511's prohibition of refunds to taxpayers after the three-year limitation period has closed. This change would be retroactive to Dec. 31, 2019.
• Allowing employers to rely on employees' self-certification of an event necessitating a hardship distribution, in line with regulations currently permitting employees to self-certify for such purposes that they otherwise lack needed funds to address a hardship.
• Permitting penalty-free withdrawals by survivors of domestic abuse for certain related reasons, including escaping an unsafe situation. This distribution of up to the lesser of $10,000 or 50% of the participant's account may also be self-certified. A recontribution may be made over a period of up to three years.

The bill also would expand availability of Roth contributions and hardship distributions in several ways:

• Participants in SIMPLE and SEP IRA plans would be able to make Roth contributions to those accounts, as participants in 401(k), 403(b), and 457(b) plans currently can.
• The rules for hardship distributions from 403(b) plans would be harmonized with those of 401(k) plans; specifically, all amounts would be available for hardship distributions, as opposed to currently, in some cases, only employee contributions (without earnings).
• Participants could opt to receive employer matching contributions as Roth contributions.

Source: Journal of Accountancy, written by Paul Bonner