Family businesses should consider reevaluating the retirement packages they offer their employees in light of impending legislation that improves retirement savings opportunities for employees and encourages participation in employer-sponsored plans.
The House of Representatives on March 29, 2022, passed "The Securing a Strong Retirement Act of 2022" (H.R. 2954), more commonly referred to as the "SECURE Act 2.0," in an overwhelming bipartisan vote of 414-5. The SECURE Act 2.0 intends to expand on the "Setting Every Community up for Retirement Enhancement (SECURE) Act," (the SECURE Act) signed into law in December 2019, which helped employers create and run retirement plans for workers. Under the SECURE Act, Congress made multiple-employer plans available to more employers; increased business tax credits for small businesses; expanded plan coverage to part-time employees; and delayed the age for required distributions from 70½ to 72.
The Senate is expected to consider a similar version of the SECURE Act 2.0 later in 2022. If the Senate passes a SECURE Act 2.0 measure, as is expected, both chambers will likely move to reconcile their separate versions before it is enacted as final law. This article explains key takeaways from the proposed SECURE Act 2.0 legislation and how these changes may impact your family business.
SECURE Act 2.0: Key Retirement Plan Changes from the House
Requires Mandatory Automatic Enrollment
Under the SECURE Act, 401(k) plans are permitted, but not required, to have automatic enrollment policies, where employees have a percentage of compensation withheld and contributed to the employer's 401(k) plan. However, the SECURE Act 2.0 would require employers who offer 401(k) plans to automatically enroll new employees in the plan at a pretax contribution level of at least three percent of the employee's pay with mandatory increases annually by one percent up to a contribution level of ten percent. The employee may specifically elect not to have contributions made or to have contributions made at a different percentage.
These proposed provisions would apply to new 401(k) and 403(b) plans established after the legislation's enactment date. Existing 401(k) plans, new businesses in existence for less than three years, and small businesses with no more than ten employees would be exempt.
Further Delays Required Minimum Distributions (RMDs)
The SECURE Act increased the age at which RMDs must begin from 70½ to 72. The SECURE Act 2.0 proposes phasing in an increase at which RMDs must begin to 75. Instead of 72 serving as the default age, RMDs would begin according to the following schedule:
- Age 73 for individuals who turn 72 after December 31, 2022, and 73 before January 1, 2030
- Age 74 for individuals who turn 73 after December 31, 2029, and 74 before January 1, 2033
- Age 75 for individuals who turn 74 after December 31, 2032
Additionally, the SECURE Act 2.0 reduces the penalty imposed on plan participants who fail to participate in RMDs from 50 percent to 25 percent. The penalty tax is further reduced to 10 percent if the taxpayer corrects the shortfall of distributions and submits a return reflecting the modified tax during the correction window.
Increases Catch-Up Contributions
Currently, a participant who is 50 or older can make a catch-up contribution of $6,500 to their 401(k) and 403(b) plans, indexed annually for inflation, for a total contribution limit of $27,000. In addition to this requirement, the SECURE Act 2.0 would also increase the annual catch-up amount to $10,000, indexed annually for inflation, for participants ages 62 through 64, starting in 2024.
Additionally, starting in 2023, the SECURE Act 2.0 would require all catch-up contributions to employer-sponsored plans to be made to Roth accounts, allowing the government to tax contributions sooner. Currently, the catch-up contribution limit for an individual retirement account (IRA) for individuals who have reached age 50 is $1,000, which is not annually indexed. The SECURE Act 2.0 proposes indexing this limit to account for inflation starting in 2023.
Expedites Part-Time Worker Eligibility
In 2019, the SECURE Act expanded eligibility for long-term, part-time workers to contribute to their employers' 401(k) plan. Under current law, Congress defines "long-term, part-time employees" as working for an employer for three years. The SECURE Act 2.0 would expedite the eligibility process for long-term, part-time workers, shortening the eligibility period from three years to two years.
Authorizes Student Loan Matching
Employers' 401(k) plan matching contributions are traditionally based on employees' elective deferrals to their retirement accounts. A 2018 IRS rule approved an employer's plan to help workers save for retirement while paying off student loans, even if employees were not making retirement contributions themselves. However, compliance concerns have remained due to the absence of authorizing legislation.
The SECURE Act 2.0 would provide a statutory basis for employers to make 401(k) matching contributions to the plan based on an employee's student loan payments. An employer's contribution on account of a student loan payment would be treated as a matching contribution and would be subject to the same vesting schedule as other matching contributions of the employer.
Senate Response to the SECURE Act 2.0 Measure
On May 26, 2022, Senate Health, Education, Labor, and Pensions (HELP) Committee Chair Senator Patty Murray (D-WA) and Ranking Member Senator Richard Burr (R-NC) released a discussion draft of the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act—legislation focused on improving retirement security and enhancing emergency savings.
Similar to the SECURE Act 2.0, the RISE & SHINE Act, among other things, proposes:
- Bolstering savings by allowing employers to offer emergency savings accounts;
- Expanding access to employer-provided retirement plans through multiple-employer plans, and through increased access to plans for part-time workers; and
- Improving communications to retirement plan participants and transparency around lump-sum buyout offers for pension plan participants. Senator Murray and Senator Burr plan to introduce and mark up final legislation in the coming weeks. A full summary of the RISE & SHINE Act can be found here.
Offering a 401(k) plan increases family businesses' potential to recruit and retain employees, improve employee engagement, reduce tax liability, and enjoy business tax credits and deductions. Given the SECURE Act 2.0 and the RISE & SHINE Act, family businesses should re-evaluate their retirement package practices to maximize their ability to support employees.