SECURE Act 2.0 Get the Jump on this Legislation
As part of our financial wellness focus for a business, we hope to keep you on the forefront of legislation that can impact the financial wellness of your business and your employees.
Even in an era of extreme polarization, both sides of the political aisle can still come to a consensus on issues like retirement legislation. In 2019, a divided government easily passed the Setting Every Community Up for Retirement (SECURE) Act. And regardless of the balance of power going forward, another retirement law, dubbed the SECURE Act 2.0, is currently in the works.
SECURE Act 2.0 has a long road to walk before it becomes law. The timing of enactment is unclear. Cost has not yet been factored in. There is a high probability of changes as it winds its way through Congress. Passage, may in fact, have to wait until the legislation can be attached to bigger priorities, such as how the original SECURE Act was tacked onto a budget bill.
As a team, we are preparing for what appears to be a significant enhancement to the retirement savings arena. Let’s zoom in on some provisions inside of this proposed act:
Allow People Who Have Saved Too Little to Set More Aside for their Retirement
- Helps employees who are struggling to save for retirement and pay off student loan debt.
- It allows employers to make a matching contribution to the employee’s retirement account in the amount of his or her student loan payment.
- Establishes a new incentive for employers to offer a more generous automatic enrollment plan and receive a safe harbor from costly retirement plan rules.
- Provides a tax credit for employers that offer these safe harbor plans starting at six percent of pay in addition to the existing safe harbor at three percent. This gives employers the certainty to offer more generous retirement benefits to their employees.
- Increases the “catch-up” contribution limits from $6,000 to $10,000 for baby boomers (individuals over age 60) with 401(k) plans.
- Allows employers to make an additional contribution on behalf of employees in a small business SIMPLE retirement plan.
Help Small Businesses Offer 401(k)s & Other Retirement Plans
- Increases the current law tax credit for small businesses starting a new retirement plan from $500 to as much as $5,000.
- Simplifies “top-heavy” rules for small business plans to reduce the cost of enrolling new employees.
- Establishes a new three-year, $500 per-year tax credit for small businesses that automatically re-enroll plan participants into the employer plan at least once every three years.
- Simplifies rules for small businesses, including allowing small businesses to self-correct all inadvertent plan violations under the IRS’ Employee Plans Compliance Resolution System (“EPCRS”) without paying IRS fees or needing formal submissions to the IRS.
Expand Access to Retirement Savings Plans for Low-Income Americans Without Coverage
- Expands the existing Saver’s Credit income thresholds to give more Americans access to increased credit amounts.
- Creates a new “government match” for low-income savers by making the Saver’s Credit directly refundable into a retirement account.
- Expands the eligibility of 401(k)s to include part-time workers that complete between 500 and 1,000 hours of service for two consecutive years.
Provides More Certainty & Flexibility During Americans’ Retirement Years
- Increases the age for required minimum distributions from age 70.5 to 72 in 2023 and age 75 by 2030, allowing all individuals choosing to work later in life to keep saving for retirement.
- Creates an exception from required minimum distributions for individuals with $100,000 or less in aggregate retirement savings, allowing them to choose to keep saving for retirement at any age.
- Reduces the current penalty for failing to take required minimum distributions from 50 percent of the shortfall amount to 25 percent in most cases, and as low as 10 percent, if you self-correct.
- Encourages expanded use of Qualifying Longevity Annuity Contracts (QLACs), retirement plans that provide annual payments to individuals who outlive their life expectancy. QLACs prevent older Americans from outlasting their savings.
Will other retirement legislation be in the pipeline?
With divided government looking likely to continue for the near future, some of the more partisan retirement issues like national mandates for all employers to offer retirement plans or restructuring of the tax incentives for retirement appear to be off the table for now. Instead, the SECURE Act 2.0 will likely focus more on incrementally incentivizing employers to expand access to retirement plans and encouraging individuals to save for the future.
Until there is a better picture of how Washington will operate in 2021, the SECURE Act 2.0 seems to be the clearest change that could start to affect financial professionals and their clients’ financial plans.
Written by: Justin Hamlin and Todd Rohrer
These are the opinions of Justin Hamlin and Todd Rohrer and not necessarily those of Cambridge, are for information purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. The strategies discussed herein are not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. However, prior to opening an account, Cambridge will consult with you to determine if your financial objectives are appropriate for investing in the model. You are also provided the opportunity to place reasonable restrictions on the securities held in your account.