The bipartisan Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law in 2019, marking the first important legislation on retirement savings since 2006. Now, Congress appears to be ready to improve that law to boost Americans’ retirement security.

The U.S. House of Representatives passed the Securing a Strong Retirement Act with a vote of 414-5. The law, also known as SECURE 2.0, comprises several provisions that, if passed, will affect both persons and businesses in the following areas.

Individual enhancements to retirement savings

1. Catch-up contributions

Qualified individuals aged 50 and up can currently make catch-up contributions to certain retirement accounts, in addition to the usual contribution limitations, of up to $6,500 for 401(k) plans and $3,000 for SIMPLE plans. In 2024, SECURE 2.0 will increase those amounts to $10,000 for 401(k)s and $5,000 for SIMPLE plans for those aged 62 to 64. (indexed for inflation). In addition, the $1,000 yearly IRA catch-up, which hasn’t changed in years, would be indexed in the future.

The bill would also change how catch-up contributions are taxed, lowering the upfront tax benefits for people who contribute the maximum amount each year. Such contributions would then be considered post-tax Roth contributions beginning in 2023. You can choose whether to make catch-up contributions before or after taxes under current law. SECURE 2.0 would also let you decide whether your employer’s matching contributions should be considered pre- or post-tax. Currently, you can only make these contributions before taxes.

2. RMDs

Required minimum distributions (RMDs) from conventional IRAs and other eligible plans were made easier under the SECURE Act. It increased the age at which you must start taking RMDs — and paying taxes on them — from 70 1/2to 72.

For over a decade, SECURE 2.0 would raise the average age. As a result, RMDs would not be required until 2023, at 73 years old, increasing to 74 in 2030 and 75 in 2033. You could then build your retirement assets tax-free for a more extended period. However, keep in mind that deferring RMDs may result in more significant withdrawal obligations in the future.

The bill also eases the penalties for not taking full RMDs. Currently, the sum withdrawn is subject to a 50% excise tax. Beginning in 2023, SECURE 2.0 would cut the tax to 25%. In addition, if the error is addressed “in a timely” way, the penalty reduces to 10%.

3. QCDs

Some taxpayers use qualified charitable distributions (QCDs) to meet their RMD requirements and philanthropic desires. For example, after reaching the age of 70 1/2, you can donate up to $100,000 per year to a 501(c)(3) charity using a QCD. Although you won’t be able to claim a charitable deduction for this donation, the payout becomes a deduction from your taxable income.

The law would make this a more appealing choice. The $100,000 ceiling would adjust based on inflation every year. You might also use a charitable gift annuity or a remainder trust to make a one-time QCD transfer of up to $50,000. (as opposed to directly to the charity). Both provisions would go into effect in the tax year following the law’s adoption.

SECURE 2.0 affects both employers and employees

4. Automatic enrollment

Employers would be required to enroll all newly qualified employees in their 401(k) plans at a deduction rate of at least 3% (but no more than 10%) of their pay. The amount then increases by 1% each year until the employee pays 10%. Employees have the option to opt-out or adjust their contribution rates.

5. Annuities

Annuities can assist retirees in avoiding running out of money in their later years. The SECURE Act encouraged employers who were hesitant to sell annuities. It would shield them from punishment for violating fiduciary duty if they chose an annuity provider that met specific criteria.

However, an actuarial test in the RMD laws has hampered the supply of annuities. For example, the test frequently prohibits annuities with guaranteed yearly rises of only 1% to 2%, return of premium death benefits, and period-certain guarantees. As a result, many people are apprehensive about picking an annuity option in a defined contribution plan or an IRA without such assurances. SECURE 2.0 would allow these promises. When the bill passes, the changes will take effect.

6. Matching contributions on student loan payments

Due to student loan repayment obligations, many employees cannot contribute to their retirement accounts. SECURE 2.0 understands this. Employees who fall into this category are not eligible for matching contributions from their employers.

Employers would be able to contribute to some retirement plans for employees who make eligible student loan payments under the bill. If passed, this would apply to contributions made after 2022 for plan years following.

7. Part-time employee eligibility

Under the SECURE Act, employers must allow part-time employees who work at least 500 hours in three years to enroll in their 401(k) plans. Part-time employees would only need to work at least 500 hours for two years to be eligible for their employer’s 401(k) plan under SECURE 2.0. For plan years beginning after 2022, the clause would be in effect.

Tax benefits for businesses

8. Small business tax credits

For tax years following 2022, SECURE 2.0 would add or increase various tax benefits for small enterprises. The SECURE Act, for example, increased the maximum amount of the credit for retirement plan establishment fees from $500 to $5,000. The three-year credit is currently available for 50% of “qualifying startup costs” for firms with fewer than 100 employees.

For firms with up to 50 employees, the new bill increases the credit to 100% of eligible costs. Except for defined benefit plans, it also offers an additional credit. Up to $1,000 per employee, the additional amount is usually a proportion of the employer’s contribution on behalf of employees. Employers with 50 or fewer employees are eligible for the entire extra credit. The extra credit gradually phases out for employers with 51 to 100 employees.

Next steps for retirement savings

While the chances of passing any retirement savings reform appear good, it’s unclear what form it will take. The Senate is working on its version. The final legislation may still add to, revise, or remove from the above. We’ll keep you informed, but feel free to contact our RRBB accountants and advisors if you have any questions.

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