SECURE 2.0 – What Employers Need to Know
On March 29, 2022, the House of Representatives passed the Securing a Strong Retirement Act of 2022 (“SECURE 2.0”, HR 2954). The vote was largely supported by both parties (414-5). The Senate will likely act on the bill later this spring. While we expect several changes in the Senate version, it is widely anticipated that the legislation will ultimately become law in some form. Below we highlight a few provisions of the bill we believe are of interest to employers.
Expanding Automatic Enrollment in Retirement Plans
For plan years beginning after December 31, 2022, SECURE 2.0 would mandate automatic enrollment in 401(k) and 403(b) plans at the time of participant eligibility (opt-out would be permitted). The auto-enrollment rate would be at least 3% and not more than 10%, but the arrangement would need an auto-escalation provision of 1% annually (initially capped at 10%). Auto-enrolled amounts for which no investment elections are made would be invested following Department of Labor Regulations regarding investments in qualified default investment alternatives. Plans established before the enactment of the legislation would not be subject to these requirements. Additional exclusions also apply.
Increase in Age for Required Beginning Date for Mandatory Distributions
For certain retirement plan distributions required to be made after December 31, 2021, for participants who attain age 72 after such date, the required minimum distribution age is raised as follows: in the case of a participant who attains age 72 after December 31, 2021, and age 73 before January 1, 2029, the age increases to 73; in the case of a participant who attains age 73 after December 31, 2028, and age 74 before January 1, 2032, the age increases to 74; and in the case of a participant who attains age 74 after December 31, 2031, the age increases to 75.
Higher Catch-Up Limit for Participants Age 62, 63 and 64
For taxable years beginning after 2022, the catch-up contribution amount for certain retirement plans would increase to $10,000 (currently $6,500 for most plans) for eligible participants who have attained ages 62-64 by the end of the applicable tax year.
Treatment of Student Loan Payments As Elective Deferrals for Purposes of Matching Contributions
For plan years beginning after December 31, 2021, employers may amend their plans to make matching contributions to employees based on an employee’s qualified student loan payments. Qualified student loan payments are defined in the legislation as amounts in repayment of qualified education loans as defined in Section 221(d)(1) of the Internal Revenue Code (which provides a very broad definition). This student loan matching concept is not a novel idea – prior proposed legislation included a similar provision, and the IRS has approved student loan repayment matching contributions in a private letter ruling. Given the difficulty many employers are finding in hiring and retaining employees, this provision of SECURE 2.0 may prove popular if it ultimately becomes law.
Small Immediate Financial Incentives for Contributing to a Plan
Under the “contingent benefit rule,” benefits (other than matching contributions) may not be contingent on the employee’s election to defer (subject to certain exceptions). Thus, an employer-sponsored 401(k) plan with a cash or deferred arrangement will not be qualified if any other benefit is conditioned (directly or indirectly) on the employee’s deferral election. SECURE 2.0 would add an exception to this restriction for de minimis financial incentives (such as gift cards), effective as of the date of enactment.
Safe Harbor for Corrections of Employee Deferral Failures
Under current law, employers could be subject to penalties if they do not correctly administer automatic enrollment and escalation features. SECURE 2.0 encourages employers to implement automatic enrollment and escalation features by waiving penalty fees if, among other requirements, they correct administrative errors within 9 ½ months after the last day of the plan year in which the errors are made. This provision would be effective as of the date of enactment.
One-Year Reduction in Period of Service Requirement for Long-Term Part-Time Workers
In a provision aimed at increasing retirement plan coverage for part-time employees, the bill would reduce the current requirement to permit certain employee participation following three consecutive years during which the employee attains 500 hours of service to two-consecutive years during which the employee attains 500 hours of service. The preceding are the maximum service requirements that a plan can impose – employers are free to impose lesser service requirements.
Recovery of Retirement Plan Overpayments
The bill includes several provisions aimed at reducing the claw-back of overpayments from retirement plans to retirees to help ensure that the fixed income of retirees is not diminished. Plan fiduciaries would have more latitude to decide whether to recoup inadvertent overpayments made to retirees from qualified plans. Further, plan fiduciaries would be prohibited from recouping overpayments that are at least three years old and made due to the plan fiduciary’s error. If a fiduciary did attempt to recoup an overpayment, the fiduciary could not seek interest on the overpayment, and the beneficiary could challenge the classification of amounts as “overpayments” under the plan’s claims procedures. Certain overpayments protected by the new rule would be classified as eligible rollover distributions.
Reduction in Excise Tax on Certain Accumulations
SECURE 2.0 would reduce the penalty for failure to take required minimum distributions from a qualified plan from 50% to 25%. The reduction in excise tax would be effective for tax years beginning after December 31, 2021.
Although we do not know exactly which provisions of SECURE 2.0 will be reflected in the Senate version, the Retirement Savings and Security Act of 2021 is expected to form the basis of the Senate’s bill. Between the Senate’s current draft and this SECURE 2.0, significant changes to retirement plans are on the horizon.