In late March 2022, the House of Representatives passed the Securing a Strong Retirement Act, H.R. 2954, better known as the SECURE Act 2.0. The Senate has not voted on it yet, as of April 2022.
But what exactly does the SECURE Act 2.0 change?
From mandatory automatic enrollment in employer retirement plans to higher catch-up contributions, more Roth account options to student loan matching, the bill aims to push Americans to save more for retirement. Read on to learn how the bill could affect you — whether you’re a worker or a small business owner.
What the SECURE Act 2.0 Bill Means for Retirement Savings
In late 2019, Congress passed the SECURE Act, tweaking retirement account and estate planning rules. Now they’re doing their best Hollywood impression by cranking out a sequel.
If signed into law — and it looks likely, given the bipartisan support — the SECURE Act 2.0 will impact your retirement planning in several ways.
Mandatory Automatic Enrollment in Retirement Plans
Businesses will need to start enrolling eligible employees automatically in 401(k) or 403(b) plans, with a default employee contribution of 3% of their salary.
Each year thereafter, the automatic contribution would rise by one percentage point until reaching at least 10%. Beyond that, businesses can opt to keep raising the default employee contribution up to 15%, but they’re not required to. Employees can always change the contribution to their defined contribution plan as they like.
The rule doesn’t apply to all businesses, however. It exempts businesses with 10 or fewer employees, companies in business for less than three years, government agencies, and religious institutions.
The law also exempts businesses with preexisting retirement plans. In practice, it only applies to new or changed retirement plans.
Higher Catch-up Contributions
Starting in 2024, older workers aged 62 to 64 could add more to their 401(k) or 403(b) accounts as a catch-up contribution.
Congress currently allows a catch-up contribution of an extra $6,500 per year in 2022, for workers aged 50 and over. The new law leaves that limit in place for workers 50 to 61 while boosting it to $10,000 per year for those in the home stretch of their career.
For SIMPLE IRA catch-up contributions, the law raises the limit from $3,000 to $5,000 per year.
But these increases in catch-up contribution limits come with one restriction. All catch-up contributions to employer plans will need to go into Roth accounts, meaning they’re still taxed as that year’s income. The federal government still wants your money, after all.
Nor does the law leave out individual retirement accounts (IRAs). Starting in 2023, it indexes the allowed catch-up contribution to inflation so that it rises each year even if Congress doesn’t expressly lift it.
These don’t have to go into Roth IRA accounts, however. You can still put the standard portion of your contribution toward a traditional IRA. That means you defer taxes this year but have to pay taxes on withdrawals in retirement.
Allows Matching Roth Contributions
Currently, employers who match their workers’ contributions must put their match toward traditional pre-tax retirement accounts.
The SECURE 2.0 Act loosens this rule, allowing employers to contribute to Roth workplace retirement accounts. That allows the contributions to compound tax-free, protecting workers against higher income taxes in retirement.
Delays Required Minimum Distributions (RMDs)
The original SECURE Act lifted the age when RMDs kicked in from 70 ½ to 72. Its sequel further delays the age for RMDs as follows:
- Starting in 2023: The RMD age rises to 73 for taxpayers who turn 72 between January 1, 2023, and December 31, 2029.
- Starting in 2030: The RMD age rises to 74 for taxpayers who turn 73 between January 1, 2030, and December 31, 2032.
- Starting in 2033: The RMD age rises to 75 for taxpayers who turn 74 after December 31, 2032.
Speeds Up Part-Time Worker Access to 401(k) Plans
The SECURE Act required employers to let part-time workers contribute to their employer-sponsored retirement plan after three years. The new SECURE 2.0 Act shortens that timeline to two years for part-timers working a minimum of 500 hours per year.
Allows Student Loan Matching Contributions
Going into 2022, the law wasn’t clear on whether employers could match workers’ student loan payments by contributing to their 401(k) or other employer-sponsored account.
The SECURE Act 2.0 clears the fog and explicitly allows employers to base their matching contributions to employee retirement accounts on the account holders’ student loan payments rather than their retirement plan contributions.
Changes to Saver’s Credit
Under current tax law, the Retirement Savings Contributions Credit (better known as the “Saver’s Credit”) lets lower-income Americans get a tax credit for 10%, 20%, or 50% of their retirement account contributions, depending on their income level.
The SECURE Act 2.0 would offer a better credit for fewer taxpayers. Under the new law, everyone who qualifies will get a tax credit of 50% of their retirement account contribution. But only individual taxpayers earning less than $24,000 and married couples earning less than $48,000 would qualify.
For reference, the maximum income to earn the saver’s credit in 2022 was $34,000 for single filers and $68,000 for married couples filing jointly.
Small Business Tax Credits
Creating and contributing to workers’ retirement accounts is expensive for employers, especially small businesses.
The SECURE Act 2.0 introduces several new tax credits that aim to reduce these costs for small businesses — and encourage more to offer retirement plans in the first place:
- Larger Tax Credit for Starting a Plan. Currently, small businesses get a tax credit of 50% of the cost of creating and administering a retirement plan for their employees for the first three years of the plan’s existence. That leaves them on the hook for the other half of the bill during that time. The new law gives small businesses a 100% tax credit for their costs, up to $5,000 per year.
- Expanded Eligibility. Only businesses with up to 50 employees currently qualify for the tax credit. The SECURE Act 2.0 doubles that eligibility to companies with 100 employees.
- Tax Credit for Joining Existing Plans. Small businesses qualify for the same tax credit for joining an existing plan, not just creating a new one. The new law gives small businesses three full years of tax credits based on when they join an existing plan. Before, they could only take the credit within the first three years of a plan’s existence.
- Credits for Employer Contributions. Employers who contribute to their workers’ plans can receive up to $1,000 in tax credits per year, per employee. Businesses with 50 or fewer employees get 100% of their contribution back in a tax credit. For businesses with 51 to 100 employees, the tax credit phases out over time. They get a 100% tax credit in the first and second years, then 75% in the third year, 50% in the fourth, 25% in the fifth, and no tax credit after that.
The SECURE Act 2.0 includes plenty of other provisions and rule changes as well. These changes include:
- Roth Allowed for SEP & SIMPLE IRAs: Currently, there’s no Roth option available for SEP IRAs or SIMPLE IRAs. The new law allows for these.
- More Incentives Allowed for Contributions: The only incentive that employers can currently offer to encourage their workers to contribute to retirement savings plans is a matching contribution. SECURE 2.0 allows employers to offer other incentives to boost participation, such as gift cards.
- National “Lost & Found” Register for 401(k)s: Many workers forget to roll over their 401(k) to an IRA or new employer account when they change jobs. That leaves an estimated $1.35 trillion in abandoned retirement investments in over 24.3 million lost accounts, according to an analysis by Capitalize. The new law creates a national “lost and found” database for employees’ retirement accounts.
- More 403(b) Options: Under current law, 403(b) accounts only offer annuity contracts and mutual funds as investment options. The new law expands these options to include collective investment trusts, which are pooled investment funds commonly used by 401(k) and government retirement plans.
- Lesser RMD Penalties: Right now, RMD penalties are among the stiffest imposed, at 50% of the amount not taken. That drops down to 25% under the new law. If corrected quickly, the penalty drops to just 10%.
- Charity Changes: The IRS allows retirees to donate up to $100,000 per year tax-free to charitable organizations, in the form of qualified charitable distributions (QCDs). The SECURE Act 2.0 indexes that $100,000 cap to inflation. It also allows one-time QCDs of up to $50,000 to a charitable gift annuity or charitable remainder trust, which aren’t currently eligible to receive QCDs.
- Domestic Abuse Exemption: Current tax law allows certain exceptions to the 10% early withdrawal penalty if you pull money from your retirement accounts before age 59 ½. The new law adds a new exception for domestic abuse victims, waiving the penalty on up to $10,000 or 50% of their account balance whichever is lower.
Retirement Savings Issues the SECURE Act 2.0 Doesn’t Address
The most glaring omission in the SECURE Act 2.0 is its silence on Social Security reform.
In its 2021 report, the Social Security Administration forecast that it will reach insolvency by 2033. Yet no politician is willing to risk the ire of the powerful senior lobby by raising the ages on the benefits schedule, despite Americans living far longer today than when Social Security launched in the 1930s.
So it remains the elephant in the retirement policy room.
The SECURE Act 2.0 also leaves an enormous loophole in the automatic enrollment requirement because it doesn’t apply to employers with existing retirement plans. Automatically enrolling employees into these plans wouldn’t add a burden for businesses, as they don’t have to match contributions, and they’re already paying for the plans’ administration. It’s an even more puzzling omission than the politically treacherous Social Security issue.
On the whole, the SECURE Act 2.0 offers some much-needed retirement planning reforms for both workers and businesses. It makes it easier for employers to save for retirement without thinking about it, and offers tax credits to businesses to help with the costs.
Personally, I would have liked to see higher IRA contributions allowed, along with higher age brackets for Social Security benefits to forestall its insolvency. But no law is perfect.
And the SECURE Act 2.0 doesn’t change the fact that you’re responsible for your own retirement planning. You need to know how much you need for your retirement nest egg and the savings milestones at each age between now and then.
Finally, don’t expect to rely on Social Security to replace your income in retirement. Today’s politicians would rather leave that problem for tomorrow’s retirees, increasing the chances of significant benefit cuts in the future.