More clarity on Secure 2.0 retirement bill

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 05/19/21


A new bipartisan retirement bill recently cleared a critical hurdle when it was passed unanimously by the House Ways & Means Committee on May 5. The action creates a path for the bill, Securing a Strong Retirement Act of 2021 (also referred to as “Secure 2.0”), to be considered by the full House at some point.

Building on previous legislation

In late 2019, Congress passed the SECURE Act, which introduced the most significant changes to the retirement industry since the Pension Protection Act (PPA) of 2006.

As a follow-up to this landmark law, a subsequent proposal was introduced within the House Ways & Means Committee last October. This proposal, Secure 2.0, was designed to build on the principles of the original SECURE Act by expanding access to retirement accounts, promoting participation, and preserving savings.

While the most recent bill largely follows the original proposal from last fall, there were some modifications, including revenue provisions expanding Roth accounts designed to offset other costs within the bill.

A closer look at SECURE 2.0

Enhancements to workplace retirement plans

The new bill:

  • Requires 401(k) and 403(b) plans to automatically enroll participants in the plans upon becoming eligible, with exceptions for existing plans, smaller plans (10 or fewer employees), newer businesses (operating less than 3 years), governmental, and church plans
  • Expands tax credits for businesses starting plans
    • For example, the current tax credit is based on 50% of administrative costs over three years, capped at $5,000 per year
    • The bill would increase the credit to 100% of administrative costs for businesses with up to 50 employees
  • Provides that student loan payments can count toward plan matching contributions
    • This provision is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt and, thus, are missing out on available matching contributions for retirement plans. This (optional) provision allows employees to receive matching contributions by reason of repaying their loan
  • Makes enhancements to 403(b) plans including the flexibility of using collective investment trusts (CITs), which are generally lower-cost investment options, and can be offered by 401(k) plans. Another provision would allow small employers to band together to offer a multiple employer 403(b) plan.
  • Provides access to long-term, part-time workers by reducing a service requirement from three to two years (based on 500 hours/year) before being able to participate in a qualified retirement plan. (Under the original SECURE Act there is an alternative provision where these workers can meet the requirement by working at least 1,000 hours in one year)
  • Additional catch-up contributions for 401(k) and SIMPLE plans at age 62, 63, and 64. For example, the catch-up contribution for 401(k) plans increases from $6,500 to $10,000 at these ages
Provisions impacting individual retirement savers

A number of provisions in the new bill would impact certain individual retirement savers. These include:

  • A gradual increase in the required minimum distribution (RMD) age to 75 The SECURE Act increased the RMD age from 70½ to 72, and this bill continues that theme by increasing the age to 73 in 2022, to age 74 in 2029, and to age 75 in 2032
  • Additional catch-up contributions for 401(k) and SIMPLE plans at age 62, 63, and 64 For example, the catch-up contribution for 401(k) plans increases from $6,500 to $10,000 at these ages
  • Reduction in penalties for not taking an RMD from the current penalty of 50% to 25%, and to as low as 10% if the mistake is corrected in a “timely manner”
  • Expansion of qualified charitable distributions (QCDs) to allow a one-time distribution of up to $50,000 to a charitable gift annuity or charitable gift trust. The provision also indexes the $100,000 annual limit for QCDs to inflation
Expansion of Roth accounts
  • The option to contribute to Roth accounts would be added to SIMPLE and SEP plans
  • Beginning in 2022, catch-up contributions to qualified retirement plans would be required to be made into designated Roth accounts within the plan
  • Currently, employer matching contributions are required to be made into pretax accounts. A new provision allows defined contribution plans to provide participants with the option of receiving matching contributions into Roth accounts

Legislative outlook

Given the broad bipartisan support of this bill, there is a decent chance that it could pass Congress later in the year, and be signed into law.

However, there may be hurdles with passage in the Senate as other, similar proposals are currently circulating within that chamber that may need to be reconciled with the House version. Additionally, given other priorities requiring Senate floor time, this proposal may not garner enough attention from party leadership in the Senate for eventual passage.

Overall, the provisions are largely positive for plans and individual retirement savers. One drawback of the original SECURE Act was the repeal of the “stretch provision” for most non-spouse beneficiaries, impacting those looking to transfer that wealth to the next generation.

One negative in the new bill for participants in higher income tax brackets would be the requirement to make catch-up contributions to Roth accounts, which results in an increase in current income.

This bill continues the “Rothification” trend to retirement savings that is being leveraged as a legislative tactic by lawmakers to raise current revenue for the federal government.

Lastly, depending on the implementation timeline, there could be some significant operational challenges for plan service providers. For example, there are roughly 25% of plans that do not offer Roth options within the plan.* For these plans, the provision requiring catch-up contributions to be made in designated Roth accounts may present challenges.

*Plan Sponsor Council of America, 63rd Annual Survey, 2020.

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