There is a potential update to the SECURE Act on the horizon that could have a big impact on your retirement plans.
Congress may often seem slow to act, but several laws have been proposed and passed, and they could affect you. We are always on the lookout for prospective laws that could cause an impact to your planning goals. In 2019, Congress passed the Setting Every Community Up for Retirement Enhancement Act of 2019, or the SECURE Act, intended “to encourage retirement savings.” On March 29, 2022, the House passed the bill, The Securing a Strong Retirement Act of 2021, commonly referred to as the SECURE Act 2.0. If this bill becomes a law after passing through the Senate and President’s desk, its many changes to the original SECURE Act may change how you should handle your retirement plans.
Original SECURE Act
The SECURE Act, in effect since December 20, 2019, has four sections:
- Expanding and Preserving Retirement Savings
- Other Benefits
- Administrative Improvements
- Revenue Provisions
It focused on modifications to the requirements for employer-provided retirement plans, IRAs, and other tax-favored savings accounts. Some of these modifications include automatic enrollment, nonelective contributions, small business tax credits and loans, eligibility rules for certain long-term, part-time employees, and minimum required distributions.
A big focus of the initial SECURE Act was the implementation of the “ten (10) year rule” for non-eligible designated beneficiaries (i.e. children, grandchildren) when they inherit a retirement account from a deceased participant, which essentially requires the withdrawal of the retirement account by the beneficiary within ten (10) years of inheritance. This rule is not changing under the proposed SECURE Act 2.0, but should continue to be reviewed in your existing estate planning and retirement planning goals.
The Changes in SECURE Act 2.0
SECURE Act 2.0’s goal is the same as the original SECURE Act: to ensure that Americans are preparing for their retirement. The proposed changes in SECURE Act 2.0 focus on fixing some of the unintended consequences from the original Act and further increases and improves Americans’ retirement preparations. Here are some of the most important changes it would bring:
Increase in age for mandatory distributions
- The age at which you must start making mandatory distributions from your retirement account would increase from 72 to 73. On January 1, 2029, it would increase to 74, and on January 1, 2032, it would increase again to 75. (Section 105). As people work longer, this adjustment would enable people to continue building their retirement savings if they are not at the point in their life yet where they need to begin pulling from their retirement savings.
Reduction in excise tax
- The excise tax is applied on qualified retirement plans for the failure to make the minimum required distributions into the plan. This would be reduced from 50% to 25%. It would be further reduced from 25% to 10% if the failure to take a required minimum distribution from an IRA is corrected in a timely manner. (Section 302). This adjustment in the excise tax would keep the Act more in line with the overall goal to help people in retirement. It would also incentivize people to correct any errors in a timely manner with an even further reduced excise tax.
Remove barriers for life annuities
- Certain barriers in the form of restricted guarantees for life annuities in qualified plans and IRAs for some people would be removed. (Section 201). This would incentivize more people to elect a life annuity under the qualified plans or IRAs.
Reduction in period of service requirement for long-term part-time workers
- The required period of service to be able to participate in 401(k) plans for long-term part-time workers would be reduced from 3 consecutive years of service with a minimum of 500 hours of service to 2 consecutive years. The alternative 1 year service requirement with 1,000 hours of service would remain. (Section 114). This would make it easier for part-time workers to participate in retirement plans.
Retirement savings lost & found
- A national and online retirement account “lost and found” database would be created in order to help employees find lost retirement accounts or to help employers find former employees to give benefits to. (Section 306). As people move and transition jobs, this would help ensure they are getting all of the savings they have accumulated and earned throughout their lives.
Student loan payments eligible for matching contributions
- Qualified student loan payments would be eligible for matching contributions by employers under a 401(k) plan, 403(b) plan, or SIMPLE IRA. The student loan payments would be treated as elective deferrals to allow them to receive matching contributions in their retirement plans. (Section 109). This would reduce the struggle between paying off student loans and saving for retirement.
Changes to catch-up contributions
- Certain retirement plan catch-up contributions required to be Roth contributions: In qualified retirement plans, catch-up contributions would be subjected to Roth IRA tax treatment rather than only if permitted by the plan sponsor. (Section 603). This would help people avoid getting taxed on their contributions.
- Indexing IRA catch-up limit: The current increase of $1,000 on the limit on IRA contributions for individuals who have reached age 50 would begin to be indexed for inflation starting in 2023. (Section 106). The amount of possible IRA contributions for those having reached 50 would continue to rise with inflation instead of staying stagnant and losing value.
- Higher catch-up limit to apply at age 62, 63 and 64: Currently, employees who are at least 50 years old are permitted to make catch-up contributions under a retirement plan in excess of the otherwise applicable limits, which is $6,500 (except for SIMPLE plans, which is limited at $3,000). These limits would increase to $10,000 and $5,000, respectively, for individuals who have attained ages 62, 63 and 64, but not age 65. (Section 107). For those 62-64, they could catch-up and better their retirement plans by delaying retirement or adding to their savings.
Optional treatment of employer matching contributions as Roth contributions
- Employers would have the option to make matching contributions on a Roth IRA tax treatment basis in their 401(k), 403(b) or governmental 457(b) plans instead of on a pre-tax basis. (Section 604). This would provide an opportunity to avoid some taxed contributions.
Strategizing Your Retirement Plans
SECURE Act 2.0 is not guaranteed to pass, and presently has only passed through the House, but if it does become law, it could make major changes to how you should handle your retirement plans. We will keep you up to date on any changes that happen and guide you to the most successful retirement possible.
Pittsburgh Estates & Trusts Attorneys
Chuck Hadad leads the Estates & Trusts team at The Lynch Law Group. He concentrates his practice in estate administration, probate, estate planning, trust administration, corporate and business planning, and real estate transactions. Please contact him at chadad@lynchlaw-group.com or by phone at 724.776.8000 with any questions or for more information related to retirement accounts or any other estate planning matters.
