SECURE Act 2.0 – An update on where we stand

Shortly after the bipartisan SECURE Act was signed into law in December 2019, legislators began working on follow-up bills that would further enhance participation in retirement plans.¹ These bills are collectively referred to as SECURE Act 2.0.

Versions of the Act have been considered and/or passed by the House of Representatives and the Senate. At some point, a final bill will need to be crafted by negotiators for both the House and the Senate. Then a vote on the final bill will be held in both chambers of Congress before moving to the President for signature.

Below is a summary of the bill that passed in the House, followed by highlights of where the Senate bills differ.

The House’s version was first built on the original SECURE Act's changes to RMD dates. An RMD is a 'Required Minimum Distribution,' which is an annual amount you must withdraw from a traditional IRA beginning at a certain age. The original SECURE Act moved the first RMD date out from age 70.5 to age 72, and the new SECURE Act 2.0 would push that out to age 75 over the next decade as follows:

• RMDs begin at 73 starting in 2023 for those turning 72 after 12/31/2022 and 73 before 1/1/2030.²
• RMDs begin at 74 starting in 2024 for those turning 73 after 12/31/2029 and 74 before 1/1/2033.³
• RMDs begin at 75 starting in 2033 for those turning 74 after 12/31/2032.⁴

In addition to the headline changes to RMDs, the legislation introduced several other changes designed to encourage participation in retirement plans.

Lower RMD penalty

Under current law, if you do not take your total RMD, you must pay a 50% excise tax. Under the SECURE Act 2.0, this penalty is reduced to 25%.⁵

401(k) plan participation changes for part-time workers

The original SECURE Act implemented a three-year timeline before part-time workers were eligible to contribute to a company 401(k) plan. The new SECURE Act 2.0 shortens this timeline to two years.⁶

Catch-up contribution changes

Current law allows for individuals over a certain age to make ‘catch-up’ contributions to increase the growth of their plans as they near retirement. The existing $6,500 401(k) and 403(b) catch-up contribution would stay the same for those aged 50 to 61, but would increase to $10,000 for those aged 62 to 64 in 2024.⁷

In addition, the current IRA catch-up contribution for those aged 50 and above is $1,000. However, along with all other catch-up provisions, this catch-up contribution would be indexed to inflation beginning in 2023.⁸ The catch-up limit for SIMPLE plans would rise from $3,000 to $5,000, and would be indexed to the limit for inflation.⁹

QCD changes

A QCD is a ‘Qualified Charitable Distribution' that allows amounts up to $100K to be donated each year from a traditional IRA to any charity you choose, instead of taking your RMD. The cap on QCDs would be indexed to inflation¹⁰ and one QCD transfer to a charitable gift annuity or charitable remainder trust would be allowed, up to $50K.¹¹

Student loan matching

The Act specifically allows employers to contribute to an employee’s retirement plan based on an employee’s student loan payments. This arrangement isn’t new since some employers have already been doing this. However, it does eliminate the questions about its legality,¹² and would apply only to SIMPLE IRAs and 403(b), 401(k) and 457(b) plans.¹³

Mandatory automatic enrollment

Employers would be required to enroll eligible new hires into a defined-contribution plan at a pre-tax rate of 3% of the employee's pay, with an annual bump of 1% up to at least 10%,¹⁴ although employees may select a different contribution if they wish.

Some employers would be exempt from the mandatory enrollment, including small businesses with 10 or fewer employees, employers that have been in business for less than three years, churches and governments.

Roth matching contributions

Starting in 2023, employer matching contributions could be treated as Roth contributions. Currently, employer match contributions must be put into a pre-tax 401(k).¹⁵

Additional changes in the House’s SECURE Act 2.0

Other changes allow nonprofits to offer defined-contribution plans to their employees,¹⁶ and also create a lost & found database for individuals to find retirement accounts left at former employers.¹⁷

Other workplace-related, retirement-focused Acts

The RISE & SHINE Act under consideration in the Senate includes many of the same provisions as the House’s version of SECURE Act 2.0. Still, it adds several new provisions, including an employer-sponsored emergency savings account (ESA).¹⁸ This provision would allow employers to offer an ESA whereby employees could make pre-tax contributions to their accounts, and employers could match those contributions up to $2,500. Employees could withdraw from the ESA penalty-free at any time.

The Senate’s “Enhancing American Retirement Now (EARN) Act” also has several similar provisions to the House’s version of SECURE Act 2.0, but is focused more on retirement plan administration and access. It includes changes such as allowing employers to match student loan payments in the same way 401(k) contributions to an employer-sponsored plan are often matched now. The EARN Act also includes a provision allowing individuals to withdraw up to $1,000 from their retirement account for qualifying emergencies and not pay an early withdrawal penalty.¹⁹

Once again, all three of these bills will need to be reconciled, and a unified bill will need to be voted on and signed by the President before it becomes law. Several legislators have expressed a goal to have a final bill passed by the end of 2022.

¹ https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/house-passes-secure-act-2-to-promote-retirement-savings.aspx
² H.R. 2954 - Section 106 (c)
³ H.R. 2954 - Section 106 (c)
⁴ H.R. 2954 - Section 106 (c)
⁵ H.R. 2954 - Section 302 (b)
⁶ H.R. 2954 - Section 116 (b)
⁷ H.R. 2954 - Section 108 (a)
⁸ H.R. 2954 - Section 107 (a)
⁹ H.R. 2954 - Section 108 (a)
¹⁰ H.R. 2954 - Section 310 (b)
¹¹ H.R. 2954 - Section 310 (a)
¹² H.R. 2954 - Section 111 (a)
¹³ H.R. 2954 - Section 111 (b)
¹⁴ H.R. 2954 - Sections 101 & 414A
¹⁵ H.R. 2954 - Section 604 (b)
¹⁶ H.R. 2954 - Section 110 (d)
¹⁷ H.R. 2954 - Sections 306 & 523
¹⁸ S.4353 – Section 202
¹⁹ S.4808 – Section 104 & 105

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