SECURE Act 2.0: A Holiday Gift for Employers and Plan Participants
“It’s beginning to look a lot like” employees who need to save for retirement (and who doesn’t?) will get an extra gift-wrapped package before the end of 2022. Major enhancements to workers’ ability to set aside money for retirement are apparently headed for passage during the current lame-duck session of Congress as part of what has been dubbed SECURE 2.0, a legislative package with overwhelming bipartisan support.
Building on the 2019 SECURE Act which, among other things, gave small businesses the ability to participate in pooled employer plans (PEPs)—basically a “group 401(k)” that allows unrelated employers to share the administrative costs of a plan that can be offered to each employer’s workers—SECURE 2.0 is likely to offer some significant new provisions that promise to make it easier and more attractive for employees to participate:
- Expands the Saver’s Tax Credit for qualified lower-income individuals (in 2023, maximum AGI of $73,000 if filing jointly) to provide tax credit equal to 50% of plan contributions with no reduction as income increases (starting in 2027).
- Allows employers to make matching contributions to plans based on qualified student loan payments by employees. This provision is intended to boost savings for those who have until now been prioritizing repaying student loans over saving for retirement.
- Automatic enrollment of employees in 401(k) or 403(b) plans, with payroll-deducted contributions of 3% of pay in the first year, rising by 1% each year until a 10% threshold is reached (employees can opt out, but research shows that few do).
- Catch-up contributions (for participants age 50 and older) will be automatically treated under Roth rules.
Some provisions of the plan could cause a few temporary headaches for employers, however, and the chief one is a provision reducing the number of years required for part-time employees to become qualified to participate in a plan. The new legislation would lower the period from the current three years to two. However, it is likely that the new law, if passed, would give employers until January 1, 2024 to make the necessary changes. And on a more positive note, the package is likely to include expansion of the startup cost credit for employers to include up to 100% of startup costs.
It’s also encouraging that, despite the polarized nature of politics these days, SECURE 2.0 seems to be popular on both sides of the aisle in Washington, DC. The consensus among insiders is that the measure will be included as part of the “must-pass” legislation to be voted on by the end of the year. Major components of the bill have passed the House by a vote of 414–5, and relevant Senate committees unanimously advanced other major portions in June. Sen. Ron Wyden (D-Oregon), chair of the Senate finance committee, has stated that he expects the legislation to pass this year.
- Alyssa Place, “SECURE Act 2.0 Will Make Retirement Savings Automatic: How Employers Can Prepare,” Employee Benefit News, December 6, 2022
- Internal Revenue Service, “Retirement Savings Contributions Credit (Saver’s Credit)”
- National Law Review, “PEPs and MEPs: Compliance and Fiduciary Considerations under the SECURE Act,” July 20, 2021
- Vanguard Institutional, “Autoenrollment and the Importance of the Default,” October 15, 2021
- Daderko and Cotter, “Key Proposed Provisions of ‘SECURE 2.0,’” Tax Adviser, October 1, 2022
- Paul Mulholland, “Washington Insiders Offer Timeline Update on SECURE 2.0,” PlanSponsor.com, October 31, 2022