The Securing a Strong Retirement Act of 2020 (don't let the date in the name mislead you, the bill is still pending), a bipartisan bill popularly dubbed “SECURE Act 2.0” because it enhances provisions under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, would provide more opportunities for workers to save for retirement and relaxes some of the required minimum (RMD) distribution rules. The bill also includes provisions that benefit small-business owners that offer retirement plans for their employees. Here are five of its key provisions.
Mandatory Automatic Enrollment
Currently, employers that sponsor retirement plans with options for salary deferral contributions may include an automatic enrollment feature. These plans are savings incentive match plans for employees' (SIMPLE) individual retirement accounts, 401(k) and 403(b) plans.
Under automatic enrollment, salary deferral contributions are automatically withheld from eligible employees’ salaries and contributed to their retirement savings accounts. An employee who doesn’t want to be automatically enrolled must actively opt out.
A survey conducted by The Pew Charitable Trusts is just one of many that shows that employer plans with automatic enrollment have higher participation rates. With only 69% of plan sponsors adopting the automatic enrollment feature, many workers aren’t getting the push they need to save for retirement.
The bill would change this from being optional to a mandatory requirement. Except for those that are exempt (small businesses with 10 or fewer employees, businesses that are less than three years old, church plans and governmental plans), employers that sponsor 401(k), 403(b) and SIMPLE IRAs would be required to automatically enroll eligible employees at a minimum salary deferral rate of 3% of compensation up to a maximum of 10%.
Simplification of the Saver’s Credit
The saver’s credit was introduced to encourage low-income earners to save for retirement by helping to offset the “cost” of making contributions to a retirement savings account. Depending on adjusted gross income (AGI) and tax filing status, eligible taxpayers could receive a nonrefundable tax credit of 10% to 50% of IRA and salary deferral contributions they make, subject to a cap of $1,000. But many don’t take advantage of this provision due to lack of awareness and understanding of how it works. The bill would remove the tiered rate of credit and replace it with a flat rate of 50% for all eligible individuals and increase the maximum dollar limit to $1,500. In addition, the Treasury Department would be required to increase public awareness of the provision.
Enhancing Catch-Up Contributions
Individuals who are at least age 50 by the end of the year may make catch-up contributions to retirement savings accounts. This is especially beneficial to those who’ve been out of the work force until later years and others who are behind with saving for retirement.
For IRAs, the catch-up contribution limit is $1,000. Catch-up contributions to IRAs aren’t indexed for inflation and have been at $1,000 since 2006. As of 2022, it would be indexed for inflation.
For employer-level retirement plans, the catch-up contribution limit for salary deferral is $6,500, except for SIMPLE IRAs, for which the limit is $3,000. These limits would be increased to $10,000 and $5,000, respectively (both indexed for inflation), for those who are at least age 60.
Relaxing RMD Rules
Individuals who are at least age 72 by the end of the year must take RMDs from their retirement accounts (RMDs don’t apply to Roth IRA owners). The bill proposes to make the following changes to RMDs:
- Increase the starting age to 75.
- No RMDs for individuals whose combined IRAs and employer plan account balances don’t exceed $100,000 on Dec. 31 of the year before they attain 75. This provision does not include defined benefit pension plans. In addition, when calculating the $100,000, defined benefit plan balances aren’t counted.
- Reduction in excess RMD rate: Retirement account owners and beneficiaries who don’t take RMDs by any applicable deadline are subject to an excess accumulation penalty of 50% of the RMD shortfall. This would be reduced to 25%. For IRAs, the rate is reduced even further to 10% if the RMD failure is corrected timely.
Qualified Charity Distribution Enhancements
IRA owners and beneficiaries with inherited IRAs may make qualified charitable distributions (QCDs) from those accounts of up to $100,000. If the QCD meets applicable requirements, it’s tax-free. The bill would increase the limit to $130,000 and extend the provisions to qualified plans.
SECURE Act 2.0 has strong bipartisan support, which increases the likelihood that it will be signed into law. While it’s anticipated that the final version will include some modifications, the overall impact would still serve to increase retirement saving opportunities, especially for low-income earners. Advisors should stay abreast of related news, so that they’re prepared to respond to related questions from clients and implement changes where suitable.
