Congress Considers 'SECURE Act 2.0' with a New Round of Retirement Plan Fixes

Retirement security is again on the congressional agenda. On May 5, the House Ways and Means Committee voted unanimously to send the bipartisan Securing a Strong Retirement Act to the full House for consideration.

The bill, introduced last November and dubbed "SECURE Act 2.0," builds on the Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law in December 2019 to improve retirement savings opportunities for workers.

The Society for Human Resource Management (SHRM) joined the employer community in 2019 to support of the first SECURE Act.

The Ways and Means Committee posted online a summary of the new bill and its full text.

"The retirement crisis in America is real, and will only get worse without easier pathways to saving and encouraging workers to start planning for retirement earlier in life," said Ways and Means Committee Chairman Richard Neal, D-Mass, and Rep. Kevin Brady, R-Tex., the committee's ranking Republican, in a joint statement. "This legislation expands automatic enrollment, simplifies many retirement plan rules, and strengthens small businesses’ ability to offer workplace retirement plans, to make it easier for Americans to plan for their golden years."

They added, "We are now one step closer to improving Americans' financial security, and hope to see this measure move through Congress and be signed into law in short order."

The version of SECURE Act 2.0 approved by the House Ways and Means Committee differs in some respects from earlier drafts of the bill. Key changes the legislation would put in place are highlighted below.

Mandatory Automatic Enrollment/Escalation

SECURE Act 2.0 would require employers that establish defined contribution plans after 2021 to automatically enroll new employees, when eligible, in the plan at a pretax contribution level of 3 percent of the employee's pay. This level would increase annually by 1 percent up to at least 10 percent but not more than 15 percent of the employee's pay. Employees could affirmatively elect a different contribution.

There is an exception for small businesses with 10 or fewer employees, new businesses (i.e., those in business for less than 3 years), church plans and governmental plans.

"The headline benefit stemming from the SECURE Act 2.0 is that employers who introduce new retirement plans would be mandated to auto-enroll employees," said Jonathan Barber, head of compensation and benefits policy research at Ayco, a Goldman Sachs company that provides financial counseling. While automatic enrollment has been growing steadily as a plan feature, it has never been mandatory.

"Far too many Americans don't take advantage of their company-sponsored 401(k) plans, and this mandate would help raise enrollment rates," Barber said.

Expand and 'Roth-ify' Catch-Up Contributions

Under current law, employees who have reached age 50 can make extra catch-up contributions to a 401(k) or similar plan. The limit on catch-up contributions for 2021 is $6,500, indexed annually for inflation. SECURE Act 2.0 keeps the existing catch-up contribution limits for those aged 50 but also increases the annual catch-up amount to $10,000 for participants ages 62 through 64, beginning in 2023. This higher limit would also be indexed for inflation.

Under current law, catch-up contributions to qualified retirement plans offered by employers can be made on a pre-tax or Roth basis (if permitted by the plan sponsor). SECURE Act 2.0 provides that effective Jan. 1, 2022, all catch-up contributions to employer-sponsored qualified retirement plans would be subject to Roth tax treatment.

"In a revenue-raising move, Secure 2.0 requires all catch-up contributions to be designated Roth contributions—presumably to allow the government to reap the income tax benefits sooner than it otherwise would," wrote T. Lake Moore V, an attorney at McAfee & Taft in Oklahoma City.

Currently, the catch-up amount for individual retirement account (IRA) contributions is $1,000 (not indexed) for individuals who have reached age 50. SECURE Act 2.0 indexes this limit for inflation starting in 2023.

Allow Roth Matching Contributions

Plan sponsors would have the option of permiting employees to elect that some or all of their matching contributions to be treated as Roth contributions for 401(k) plans. Employer matching contributions designated as Roth contributions would not be excludable from employees' gross income.

Delay Mandatory Distributions

The original SECURE Act increased the age at which plan participants are required to begin taking mandatory distributions to 72. SECURE Act 2.0 increases the required minimum distribution age further to 73 starting in 2022, and increases the age to 74 starting in 2029 and to 75 starting in 2032.

Expedite Part-Time Workers' Participation

The original SECURE Act expanded eligibility for long-term, part-time workers to contribute to their employers' 401(k) plan. SECURE Act 2.0 "would expedite the addition of long-term, part-time workers as eligible participants" by shortening from three years to two years the measurement period for eligibility that starts in 2021, wrote Katharine Finley, senior compliance counsel at Hall Benefits Law in Atlanta. As a result, "the first group of long-term, part-time workers would become eligible for participation in the elective deferral of defined contribution plans as of Jan. 1, 2023," a year earlier than under the current law.

[Related SHRM Article: For 2021, 401(k) Contribution Limit Unchanged for Employees, Up for Employers]

Authorize Student-Loan Matching

Employers' 401(k) plan matching contributions are traditionally based on plan participants' elective deferrals to their retirement accounts. While the IRS has opened the door to allowing employers to make 401(k) matching contributions based on employees' student-loan payments—even if employees aren't making retirement contributions themselves—compliance concerns have remained due to the absence of authorizing legislation. SECURE Act 2.0 would finally provide a statutory basis for employers to adopt this feature.

The matching contributions for student loan payments must vest under the same schedule as other matching contributions.

"We project that the passage [of SECURE Act 2.0] would let 3.4 million people who cannot currently save for retirement due to their student loan bill to immediately begin saving," said Laurel Taylor, founder and CEO of FutureFuel.io, a provider of software for managing student debt repayment benefits.

It would also "allow borrowers to save for retirement using tax-exempt employer contributions to their retirement account, while they simultaneously pay down their debt," she noted. "College graduates with student debt on average have half the 401(k) balance of their debt-unburdened colleagues because they are forced to delay saving, as their student loans take priority. This would rectify that inequality."

Tying employers' 401(k) matching contributions to employees' student-loan payments also could help plan sponsors pass the annual 401(k) plan anti-discrimination test, which prevents plans from favoring highly compensated or key employees, Finley said.

"If the employee demographic would result in an increase in matching contributions for non-highly compensated individuals as a result of incorporating this change, then it may be worth considering the change depending on historic testing results," she pointed out.

Mike Barry, a senior consultant at retirement plan advisory firm October Three, explained that "under the Secure 2.0 proposal, plans would be permitted to perform the ADP test separately for those participants receiving matching contributions on loan repayments. This is a significant change from prior proposals that will ease ADP testing under student loan matching contribution programs for some sponsors."

Barber noted a concern for employers if SECURE Act 2.0 is enacted. "While the bill makes progress toward addressing the growing student-loan debt issue in this country, it only addresses one portion of the population," he said. "Employees may be upset that only certain people can use this new feature, and companies that want to ensure benefit programs are fair to all employees will likely take action to help employees with other forms of debt."

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Additional Provisions

Among other key changes, SECURE Act 2.0 also would:

• Create a national database for Americans to find lost retirement accounts.
  

• Expand self-correction opportunities, including for participant loan errors and employee elective deferral failures.
  

• Require the Treasury Secretary to take steps to increase public awareness of the Retirement Savings Contributions Credit (also known as the saver's credit), available to low- and moderate-income workers.
  

• Extend to 403(b) retirement plans some of the design features of 401(k) plans.
  

• Eliminate certain barriers to offering lifetime income annuities as a retirement plan investment option.
  

Political Prospects

According to attorneys at law firm Seyfarth, "Although there is bipartisan support, it is likely that the provisions will be modified as the bill makes its way through Congress. Presently, this proposal is expected to be taken up by the Senate after its August recess."

James Klein, president of the American Benefits Council, which advocates for employer-sponsored benefit plans, noted that "Retirement measures, like most other things, don't really move on their own. They have to be appended to some larger budget bill or to a comprehensive tax reform measure. So…we should look to the viability of those bigger picture measures as being the best chance for any of this retirement-related legislation to move forward."

When the first SECURE Act was enacted, it was folded into an end-of-year spending bill.

In Barry's view, "Secure 2.0 has broad bipartisan support, and there is a significant likelihood that it will pass this year, either as a standalone or as part of broader legislation."

[Related SHRM article: IRS Guidance Clarifies Employers' SECURE Act Obligations]