On March 29, the U.S. House approved the Securing a Strong Retirement Act by a vote of 414 to 5. The bipartisan legislation is commonly referred to as SECURE 2.0 because it builds on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. It includes a broad range of provisions intended to expand coverage, increase retirement savings, encourage plan sponsorship, and simplify plan administration and compliance. Focus will now shift to the Senate, where similar legislation is expected to begin moving through the legislative process over the next few months. Legislation could be enacted this year.
The legislation approved by the House incorporates provisions previously approved by the Ways and Means Committee (as part of the Securing a Strong Retirement Act)1 and by the Education and Labor Committee (as part of the Retirement Improvement and Savings Enhancement Act) as well as other targeted provisions.
Key provisions of SECURE 2.0
The Securing a Strong Retirement Act includes technical corrections to the SECURE Act, provisions addressing IRAs and other changes. Some of the provisions to increase retirement savings include:
- Mandatory automatic enrollment. In general, for plan years beginning after 2023, most new 401(k) and 403(b) plans would be required to include automatic enrollment and automatic escalation. Automatic enrollment would require a contribution rate of 3% to 10% of compensation. Contributions would need to increase one percentage point annually up to at least 10% (and not more than 15%) of compensation. Plans in existence prior to enactment would be grandfathered. Employers that join a multiple employer plan (MEP) or pooled employer plan (PEP) after the date of enactment would be subject to the automatic enrollment mandate.
- Increase required beginning date for RMDs. The beginning date for required minimum distributions (RMDs) would gradually increase to age 75 (starting with age 73 for distributions that must begin in 2023, age 74 for those beginning in 2030 and age 75 for those beginning in 2033).
- Higher catch-up contribution for individuals age 62 to 64. The annual catch-up contribution limit would be $10,000 ($5,000 in SIMPLE plans and SIMPLE IRAs) for employees who are age 62 to 64.
- Matching contributions on student loan payments. Employers would be permitted to make matching contributions to 401(k) plans and 403(b) plans based on an employee’s qualified student loan payments. Nondiscrimination testing applicable to elective deferrals could be performed separately for employees who receive such matching contributions. The plan would be required to match and vest qualified student loan payments and elective deferrals at the same rate.
- Reduced tenure for part-time employee eligibility. Part-time employees would be eligible to participate in employer-sponsored defined contribution plans after they have completed 500 hours of service for two consecutive years (rather than three consecutive years as required under the SECURE Act). In addition, the legislation would incorporate the part-time employee eligibility requirement into ERISA and apply the requirement to ERISA-governed 403(b) plans.
- 403(b) plan investment in collective investment trusts. Contributions to 403(b) custodial accounts could be invested in collective investment trusts. Due to an issue of legislative jurisdiction, securities law exemptions related to this requirement have been removed from the legislation. Stakeholders will continue working with lawmakers to restore the provisions before the legislation is enacted.
- 403(b) MEPs. In general, 403(b) MEPs and PEPs would be permitted.
- Clarification of PEP trustee duties. Currently, a trustee must be responsible for collecting contributions from participating employers in a PEP. The legislation would clarify that any named fiduciary could be responsible.
- Small immediate financial incentives for plan participation. Employers would be permitted to offer de minimis financial incentives, such as small gift cards, to encourage participation in 401(k) and 403(b) plans.
- Safe harbor for corrections of employee elective deferrals. The legislation would establish a grace period to correct automatic enrollment and automatic escalation errors without penalty under certain conditions.
- Remove RMD barriers for life annuities. Life annuities would be allowed in defined contribution plans and IRAs that include certain annual increases, lump sum return of premium death payments and other features.
- Qualifying longevity annuity contracts. The rules for qualifying longevity annuity contracts (QLACs) would be modified by repealing the provision that limits QLAC premiums to 25% of the account balance, facilitating QLACs that allow spousal survivor rights and making other changes.
- Variable exchange-traded funds (ETFs). The Treasury Secretary would be directed to update regulations to facilitate the use of ETFs in variable contracts.
- Recovery of plan overpayments. In general, plan fiduciaries could decide that the plan will not recover overpayments mistakenly made to retirees, and protections would be established for retirees in situations where plan fiduciaries decide to recover overpayments. In addition, rollovers of the overpayments would remain valid.
- Reduced penalty for failure to take minimum distributions. The excise tax for failure to take minimum distributions would be reduced from 50% to 25%. If the failure is corrected in a timely manner, the excise tax would be reduced to 10%.
- Report to Congress regarding reporting and disclosure requirements. The Department of Treasury, Department of Labor (DOL) and the Pension Benefit Guaranty Corporation would be directed to review current reporting and disclosure requirements for retirement plans and make recommendations to Congress to consolidate, simplify and improve the requirements.
- Disclosure relief for unenrolled employees. Defined contribution plans would not be required to provide notices to unenrolled participants, except for an annual reminder that the individual is eligible to participate in the plan.
- Retirement savings lost and found. The legislation incorporates provisions of the Retirement Savings Lost and Found Act that would direct Treasury to establish a national database to help workers locate retirement benefits from former employers. In addition, it would increase the cash-out limit to $7,000.
- Self-correction of inadvertent violations. In general, inadvertent plan violations could be self-corrected under the Employee Plans Compliance Resolution System without a submission to the IRS if the self-correction occurs before the IRS discovers the violation on audit.
- Eliminate the 457(b) “first day of the month” requirement. Participants in a 457(b) plan would be permitted to request changes in their deferral rate prior to the date that the compensation being deferred is available (rather than prior to the beginning of the month in which the deferral will be made).
- Mandatory Roth treatment for catch-up contributions. Catch-up contributions to 401(k), 403(b) and governmental 457(b) plans would be required to be made on a Roth basis. The provision serves as a revenue offset for other provisions in the legislation.
- Matching contributions on a Roth basis. Employers would be able to permit employees to elect for their matching contributions under 401(k), 403(b) and governmental 457(b) plans to be made fully or partially on a Roth basis. This provision would also serve as a revenue raiser.
- Annual paper benefit statement. Defined contribution plans would be required to provide at least one paper benefit statement per year, and defined benefit plans would have to provide at least one paper statement every three years, unless the participant requests otherwise.
- Top-heavy testing. If a plan covers employees who are otherwise excludable under the general age and service rules and the employees separately meet the top-heavy minimum contribution rules, the employees could be excluded from consideration in determining if the plan (or any plan of the employer) satisfies the top-heavy rules.
- Distributions to firefighters. The legislation would extend existing special distribution rules for qualified public safety employees to private sector firefighters.
- Statute of limitations. The statute of limitations for taxes related to prohibited transactions, excess contributions or RMD failures would begin on the date the income tax return is filed for the year the violation occurred (or the date the return would have been due if a return is not required).
- Saver’s credit. The Saver’s credit would be 50% of eligible retirement contributions for taxpayers with adjusted gross income below the threshold specified in the legislation (initially $48,000 for joint filers and surviving spouses, $36,000 for heads of household and $24,000 for single taxpayers). The credit would phase out for income exceeding the thresholds. In addition, Treasury would be directed to take steps to increase public awareness about the Saver’s credit.
- Repayment of qualified birth and adoption distribution. Repayment of qualified birth or adoption distributions would have to be made within three years of the date the distribution was received. The SECURE Act, which authorized the distributions, did not limit the repayment period.
- Self-certification of hardship. Employees would be permitted to self-certify that an event constitutes a hardship for purposes of hardship withdrawals. In addition, the legislation would codify the current rule that permits self-certification regarding that the amount of a distribution does not exceed the need.
- Domestic abuse withdrawals. The legislation would permit penalty-free withdrawals of up to $10,000 in the case of domestic abuse.
- Family attribution rules. For purposes of determining whether two or more businesses must be aggregated for certain nondiscrimination tests, ownership by family members is attributed to other family members. The legislation would make changes to these attribution rules, including by disregarding community property laws.
- Retroactive plan amendments. Certain retroactive plan amendments that increase benefits (other than matching contributions) for a year could be made by the due date of the employer’s tax return for the year.
- Small employer tax credits. The current-law tax credit for small employers to offer retirement plans would be expanded by increasing the credit percentage from 50% to 100% of eligible expenses for employers with up to 50 employees and by offering an additional tax credit for employers that make plan contributions for their employees. In addition, the credits would be available to eligible employers that join a MEP or PEP, regardless of whether the MEP or PEP has been in existence for more than three years.
- Performance benchmarks for TDFs. The DOL would be directed to provide that investments that contain a mix of asset classes may be benchmarked against a blend of broad-based securities market indices. The DOL would report to Congress within three years on the utilization, effectiveness and participants’ understanding of the benchmarking provision.
- DOL review of pension risk transfer. The DOL would be directed to review ERISA’s fiduciary standards for selecting an annuity provider for a defined benefit plan to determine whether amendments to the standards are warranted and report to Congress on the findings of the review, including an assessment of risks to participants.
- Conform 403(b) and 401(k) hardship rules. The legislation would bring the current 403(b) and 401(k) hardship rules into agreement.
Going forward
Senate committees could consider similar bills during the next few months. Final legislation could be enacted later in 2022, possibly after the November elections.
Footnote
1 For more information on the House Ways and Means Committee’s approved version of the Securing a Strong Retirement Act, see “House committee approves SECURE 2.0,” Insider, May 2021.
