SECURE 2.0 is passed by the House

On March 29, 2022, the House of Representatives passed H.R. 2954, Securing a Strong Retirement Act of 2022, also known as SECURE 2.0. The bill, which has bipartisan support, builds upon the SECURE Act of 2019 with the goal “to increase retirement savings, simplify and clarify retirement plan rules, and for other purposes.” SECURE 2.0 expands and clarifies certain provisions of the SECURE Act. Next, the bill will go to the Senate where provisions from the Senate’s version, the Retirement Security and Savings Act of 2021, may be included.

The following highlights the primary changes within SECURE 2.0:

Increase in beginning age for required minimum distributions

The required minimum distribution (RMD) age would increase gradually from 72 to 75, as follows:

• Age 73, beginning on Jan. 1, 2023
• Age 74, beginning on Jan. 1, 2030
• Age 75, beginning on Jan. 1, 2033

The objective is to ensure that individuals have retirement savings to use during their lifetime.

Catch-up contributions

• Certain catch-up contributions required to be Roth contributions: All catch-up contributions to employer-sponsored qualified retirement plans would be subject to after-tax Roth treatment effective Jan. 1, 2023. Catch-up contributions to IRAs would continue to be pre-tax, but are significantly less than catch-up contributions to employer-sponsored plans ($1,000 versus $6,500.) This provision is not included in the Senate’s version.
• IRAs: Individuals who have attained age 50 are permitted to contribute a catch-up contribution to their IRAs. Under existing law, the catch-up amount is $1,000 and is not indexed. SECURE 2.0 would index the catch-up amount beginning in 2024.
• Increases catch-up limits for ages 62, 63 and 64: Current law permits employees who have attained age 50 to make catch-up contributions to a retirement plan in excess of certain limits. SECURE 2.0 would allow individuals who have attained ages 62, 63, or 64 (but not 65) during the year to make larger catch-up contributions to their retirement plans. The annual limit would increase to $10,000 compared to the 2022 limit of $6,500, and in the case of SIMPLE plans, the limit would increase to $5,000 from $3,000. Both limits would be indexed. This provision would be effective for taxable years beginning in 2024.

Period of service requirement reduced for long-term, part-time employees

The SECURE Act expanded eligibility to include long-term, part-time workers to contribute to their employers’ 401(k) plan who complete three consecutive years of service with at least 500 hours of service in each year. SECURE 2.0 reduces the time period to two years. It also provides that pre-2021 service is disregarded for vesting just as such service is disregarded for eligibility purposes under current law. As a result, long-term, part-time employees would become eligible for participation in the elective deferrals for plan years beginning in 2023.

Roth contributions expanded

• Under current law, employer-matching contributions to 401(k) and 403(b) plans must be made on a pre-tax basis. SECURE 2.0 would provide participants of these plans with the option of receiving matching contributions on a Roth after-tax basis. This provision would be effective as of the date of enactment.
• SIMPLE IRAs may accept employee Roth contributions. SEP IRAs may treat employer and employee contributions as Roth contributions. These provisions would be effective beginning in 2023.

Student loan payments treated as deferrals for purposes of matching contributions

SECURE 2.0 permits an employer to make matching contributions under a 401(k) plan, 403(b) plan or SIMPLE IRA with respect to “qualified student loan payments.” Qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee. Qualified student loan payments made by the employee could be matched up to the annual elective deferral threshold. The employee would be required to certify to the employer making the matching contribution that the employee actually made the student loan payment; the employer may rely on the employee’s certification. This provision would be effective for plan years beginning in 2023.

Auto-enrollment in retirement plans expanded

Automatic enrollment of eligible employees was first introduced in 1998 and has significantly increased participation in 401(k) plans, particularly among younger, lower-paid employees, providing them with the opportunity to save for retirement. SECURE 2.0 would require 401(k) and 403(b) plans to automatically enroll an employee once the employee is eligible to participate. All 401(k) and 403(b) plans currently in place would not be subject to this requirement. Automatic enrollment would also include an automatic escalation in an employee’s annual rate of deferral. The initial rate would be at least 3% and would increase by 1% each year up to 10%. Employees would have the opportunity to change their deferral rates as well as opt out of participating in the plan. This provision would be effective for plan years beginning in 2024.

Retirement plan amendments

SECURE 2.0 conforms the plan amendment dates under the SECURE Act and the Coronavirus Aid, Relief and Economic Security (CARES) Act to the first plan year beginning in 2024 (2026 for governmental plans) rather than 2022 and 2024.

Other provisions of interest

• Safe harbor for corrections of employee elective deferral failures
• Reduction in excise tax for failure to take RMD
• Expansion of Employee Plans Compliance Resolution System to allow self-correction of plan loan errors
• Defined contribution plans required to provide paper statement to participant at least once per year unless participant elects out
• Repayment of qualified birth or adoption distribution (QBAD) limited to three years
• Employer may rely on employee certifying that hardship distribution conditions are met
• Family attribution rules updated for spouses in community property states and for attribution of stock between parents and minor children

We encourage you to connect with your Baker Tilly advisor regarding how any of the above may affect your tax situation.