SECURE Act 2.0: What it means for 401(k) Plans

On Could fifth, the Home Methods and Means Committee unanimously handed the Securing a Sturdy Retirement Act of 2021. The invoice is predicted to be voted on later this summer season by the complete Home, the place it’s already seeing sturdy assist.

The brand new invoice, nicknamed SECURE Act 2.0, builds on the SECURE (Setting Each Neighborhood Up for Retirement Enhancement) Act of 2019, which expanded retirement protection to extra Individuals. As well as, the brand new invoice contains a number of provisions designed to ease retirement plan administration which ought to encourage extra employers to undertake 401(okay) plans.

Key provisions of SECURE Act 2.0 associated to 401(okay) plans embrace:

1. Enlargement of automated enrollment. Requires new 401(okay) plans to routinely enroll staff at a default fee between 3% and 10% and routinely escalate contributions at 1% per 12 months to at the very least 10% (however not more than 15%). In fact, staff can all the time change their contribution fee or choose out of the plan at any time. Current plans are grandfathered, and new companies in addition to these with 10 or fewer staff are exempt.
2. Enhanced tax credit for small employer plans. The SECURE Act gives companies with fewer than 100 staff a three-year tax credit score for as much as 50% of plan start-up prices. The brand new invoice will increase the credit score to as much as 100% of the prices for employers with as much as 50 staff. As well as, SECURE Act 2.0 affords a brand new tax credit score to employers with 50 or fewer staff, encouraging direct contributions to staff. This new tax credit score could be as a lot as $1,000 per collaborating worker.
3. Elevated age for required minimal distributions (RMDs) to 75. The SECURE Act elevated the RMD age to 72 (from 70.5). The brand new invoice will increase the RMD age even additional: to 73 in 2022; 74 in 2029 and in the end 75 in 2032.
4. Larger catch-up limits. Catch-up contributions imply older Individuals could make elevated contributions to their retirement accounts. Underneath present legislation, contributors who’re 50 or older can contribute a further $6,500 to their 401(okay) plans in 2021. The brand new invoice will increase these limits to $10,000 for 401(okay) contributors at ages 62, 63, and 64.
5. Potential to match on pupil loans. Heavy pupil debt burdens forestall many staff from saving for retirement, usually stopping them from incomes useful matching contributions. Underneath this provision of the invoice, pupil mortgage repayments may rely as elective deferrals, and qualify for 401(okay) matching contributions from their employer. The invoice would additionally allow a plan to check these staff individually for compliance functions.
6. One-year discount in interval of service necessities for long-term half time employees. The 2019 SECURE Act requires employers to permit long-term part-time employees to take part within the 401(okay) plan in the event that they work 500-999 hours consecutively for 3 years. The brand new invoice reduces the requirement to 2 years. Remember the fact that plans with the conventional 1000 hours in 12 months eligibility requirement for part-time staff should enable contributors who meet that requirement to enter the plan.
7. Retroactive first 12 months elective deferrals for sole proprietors. Due to the SECURE Act, employers can retroactively set up a revenue sharing plan for the earlier 12 months up till their enterprise tax deadline. This permits the proprietor to obtain revenue sharing for the earlier 12 months with out having to make any worker deferrals. SECURE Act 2.0 extends the retroactive rule to sole proprietors or single member LLCs, the place just one proprietor is employed. For instance, a sole proprietor proprietor would have till April 15, 2022 to allocate revenue sharing and elective deferrals for the 2021 plan 12 months.
8. Penalty-free withdrawals in case of home abuse. The brand new invoice permits home abuse survivors to withdraw the lesser of $10,000 or 50% of their 401(okay) account, with out being topic to the ten% early withdrawal penalty. As well as, they might have the flexibility to pay the cash again over 3 years.
9. Enlargement of Worker Plans Compliance Decision System (EPCRs). To ease the burdens related to retirement plan administration, this new laws would develop the present corrections system to permit for extra self-corrected errors and exemptions from plan disqualification.
10. Separate utility of prime heavy guidelines overlaying excludable staff. SECURE 2.0 ought to make annual nondiscrimination testing a bit simpler by permitting plans to separate out sure teams of staff from prime heavy testing. Separating out teams of staff is already allowed on ADP, ACP, and protection testing.
11. Eliminating pointless plan necessities associated to unenrolled contributors. At the moment, plans are required to ship quite a few notices to all eligible plan contributors. The brand new laws eliminates sure discover necessities.
12. Retirement financial savings misplaced and located – SECURE Act 2.0 would create a nationwide, on-line misplaced and located database. So-called “lacking contributors” are sometimes both unresponsive or unaware of 401(okay) plan funds which can be rightfully theirs.