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Secure Act 2.0

Secure Act 2.0

December 16, 2022

There is a growing lack of confidence about being prepared for retirement. Congress feels that something must be done to improve America's savings problem. Though expanding access and increase default participation are a great start, we really need to address the root cause for the lack of preparedness. Many Americans cannot afford to save for retirement. Half of American households don't save for retirement at all. 

Auto enrollment sounds nice, but it is unfair to lower wage workers who need every penny to pay their ongoing bills month to month. Extra deductions seem like an important feature as well, but lower paid workers with young children are very likely to pay little if any tax with child tax credits. So, the tax savings is clearly more attractive to upper income earners.

One thing remains certain, Social Security is running out of money and with the last 2 years of high cola adjustments it will be sooner than 2035. Something must be done to sure up the social security system. It will not be long before we are talking seriously about cutting benefits for wealthier Americans and raising the FICA tax and earnings subject to FICA and pushing back the age for FRA full retirement age benefits. 

Here are features of the legislation that may be signed into law before the end of the year.

The House version of the bill has already passed the house, but the Senate version has not been voted on yet.

House Bill: Secure Act 2.0 Would Allow People to Save More

  • Automatic enrollment in retirement plans. Since the late 1990s, employers have had the option to add eligible new employees to their retirement plans, typically with a contribution level of 3% of their annual salary. Secure Act 2.0 would require employers with 401(k) or 403(b) plans to automatically enroll all new, eligible employees at a 3% contribution rate that would tick up by 1% annually until it reaches 10%.
  • A stronger Saver’s Credit. This little-known boon for low- to medium-income households offers extra tax dedutions when lower earners save for retirement. The bill increases the number of people who qualify and sets the credit at 50%, rather than having it decline as you earn more. These changes would be implemented starting in 2027.
  • Bigger catch-up contributions. Secure Act 2.0 would let people who are age 62 to 64 contribute an additional $10,000 to their 401(k) or 403(b) plans, or an additional $5,000 to SIMPLE IRA plans. In 2022, catch-up contributions for these plans are set at $6,500 and $3,000, respectively, for savers 50 or over. Beginning in 2023, these catch-up contributions would be taxed as Roth contributions, meaning they would be subject to income tax before being invested for retirement. The bill would also index the IRA catch–up contribution limit of $1,000 to inflation.
  • Extra assistance for student loan borrowers. People who are making payments on their student loans but not saving for retirement would be able to get employer matching contributions. Companies would match student loan payments, up to a certain percentage of an employee’s salary, and deposit the funds in the employee’s retirement account—even if the employee made no other contributions of their own.

Secure Act 2.0 Would Improve Retirement Plans

  • Delay required minimum distributions (RMDs). Secure Act 2.0 would increase the age RMDs begin to 73 by 2022, to 74 by 2029 and to 75 by 2032. These required withdrawals give Uncle Sam the chance to collect tax revenue from retirement savings and keep them from becoming an estate planning vehicle.
  • Make it easier to buy annuities. Secure Act 2.0 would make it easier for plans to offer annuities by easing certain RMD requirements and make Qualified Longevity Annuity Contracts (QLACs) more appealing.

Secure Act 2.0 Would Lower Costs for Employers

  • Tax credits for small businesses. The bill would change the three-year small employer startup tax credit by raising the credit to 100% from 50% for companies with up to 100 employees (up from 50), with a per-employee cap of $1,000.
  • Aid for small 403(b) plans. The Secure Act lowered costs and regulations so small businesses could join up and take part in so-called multiple employer plans (MEP). Secure Act 2.0 would extend that treatment to 403(b) plans, which are typically offered by nonprofits and government entities.
  • Ease up on plan paperwork. The bill would also lessen penalties for some reporting mistakes.

The Senate version called EARN Act or the RISE and SHINE Act and many of their provisions were in the House bill. A few more features were in the Senate version that could help Americans save for retirment.

  •  Offer emergency savings accounts. Companies would have the option to offer emergency savings accounts linked to an employee’s retirement saving plan. Employees could opt to save up to 3% of their annual pay, or a maximum of $2,500, as an after-tax contribution.
  • Encourage employees to invest for retirement. If a workplace plan automatically enrolls its workers, yet a worker decides not to participate, the bill would require employers to prompt these non-participating employees to reconsider their decision at least every three years.
  • Create retirement plans for domestic employees. The bill would allow employers of domestic workers, such as nannies, to offer a retirement plan through a Simplified Employee Pension IRA (SEP IRA).