After much anticipation and with bi-partisan support, the SECURE Act 2.0 has been approved by both chambers of Congress as part of the $1.7 trillion spending bill that will fund the government through the 2023 fiscal year. The Act contains more than 90 sections (items) of new or updated retirement reforms. Overall provisions of SECURE 2.0 further improve the ability for workers to save for retirement by encouraging participation and simplifying plan access.
While some of the changes are effective after the end of this year, many of them will go into effect over the next decade. Guidance regarding the mechanics of these new reforms will be needed from regulators including the DOL and the IRS. SS&C Retirement Solutions will be working closely with our client partners, industry trade groups and the applicable regulatory agencies to ensure we are prepared to bring our services, products and technologies forward to meet the challenges and opportunities provided in these new provisions under SECURE 2.0. We will regularly communicate with you as the requirements are clarified.
What’s In the Act?
As expected, many of the reforms that were included in the various legislative initiatives that had been introduced during this congressional session made their way into SECURE 2.0. The bill includes more than 90 retirement provisions—far too many to cover in-depth for this blog; however, the following provisions are of note:
- 403(b) Plan Expansion: Allows for 403(b) Plans to be structured as Multi-Employer Plans (MEPs) and Pooled Employer Plans (PEPs), including providing relief from the “one bad apple” rule. The effective date is after December 31, 2022. Additionally, 403(b) plans will also be able to invest in collective group trusts effective from the date of enactment.
- Mandatory Automatic Enrollment: New plans adopted after the effective date will be required to include automatic enrollment of employees with a deferral rate equal to at least 3% and no more than 10% of the employee's pre-tax pay. Plans are required to increase the deferral percentage of automatically enrolled participants 1% annually until they reach no less than 10% and no more than 15% (cap for auto-escalation for non-safe harbor plans is 10%, for plan years ending before January 1, 2025, and then jumps to 15%). Plans established before the date of enactment, SIMPLE Plans and Governmental and Church Plans are exempt from this requirement. Small businesses with 10 or fewer employees, and employers that have been in business for less than three years, are exempt until such time as they no longer qualify for those exemptions. Effective after December 31, 2024.
- Student Loan Matching: In an effort to help those struggling to save for retirement due to student debt, SECURE 2.0 allows plans to make matching contributions to the plan for those who pay off higher education loans in lieu of making employee contributions to the plan. Effective after December 31, 2023
- Required Minimum Distributions (RMDs): The 2019 SECURE Act increased the RMD age to 72 from 70. SECURE 2.0 further increases the RMD age to 75, implementing the age change in two stages over the next decade. Effective January 1, 2023, the RMD age will be 73; thus, those individuals who will turn 72 in 2023 will not have to start RMDs. The RMD age increases to age 75 on January 1, 2033. Additionally, for taxable years beginning after the date of enactment, SECURE 2.0 lowers the excise tax for not taking RMDs from a 50% to 25% of the missed RMD. If the missed RMD is corrected within the applicable correction window the excise tax is further reduced to 10%.
- Increased Catch-up for Older Workers: Beginning in 2025, the catch-up contribution limit for those aged 60 to 63 contributing to a 401(k) or SIMPLE Plan has been raised. For individuals in 401(k) plans who have reached the ages of 60 to 63 in 2025, the value will grow from $6,500 to the greater of $10,000 or 50% more than the regular catch-up amount in effect for 2024. (The limit for SIMPLE Plans will grow from $3,000 to the greater of $5,000 or 50% more than the regular catch-up amount in effect for 2025. However, effective after December 31, 2023 catch-up contributions for compensation in excess of $145,000 (indexed) must be made as designated Roth contributions.
- Indexing IRA Catch-Up Limit: Beginning after December 31, 2023, IRA catch-up contribution limits will be indexed to inflation.
- 401(k) Access for Part-Time Workers: The original SECURE Act expanded coverage of workplace retirement plans to require that part-time employees, who were traditionally prevented from participation due to their reduced hours of service, be granted plan eligibility if they worked for a minimum of 500 hours for three consecutive plan years. SECURE 2.0 builds upon this reform by further reducing the Part-Time eligibility requirement to two consecutive years of service with at least 500 hours a year. Additionally, part-time employees granted eligibility under this section will be given vesting credit for a year of service for any year, beginning after January 1, 2023, in which they accrue at least 500 hours of service. Effective after December 31, 2024.
- Saver’s Match: This provision repeals and replaces the current Saver’s Credit, from a credit paid in cash as part of a tax refund, to a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan, subject to certain withdrawal restrictions. The match is 50% of IRA or retirement plan contributions up to $2,000 per individual. The match phases out between $41,000 and $71,000 in the case of taxpayers filing a joint return. Effective after December 31, 2026.
- Investments into a Qualified Longevity Annuity Contract (QLAC): In an effort to remove regulatory obstacles from the 2014 regulations that appear to have prevented QLACs from reaching their intended purpose, SECURE 2.0 repeals the 25% premium up to a cap of $200,000 (indexed) to be used from an account balance to purchase a QLAC. This opens up the ability for savers to convert a larger proportion of funds to guaranteed income streams. Effective for contracts purchased or received after the date of enactment.
- Requirement to Provide Paper Statements: With respect to defined contribution plans, unless a participant elects otherwise, a paper statement must be provided at least once annually. For defined benefit plans, a paper statement must be provided at least once every three years unless a participant elects otherwise. Effective after December 31, 2025.
What Do The Changes Mean?
The wide range of changes under SECURE 2.0 highlight the need for greater flexibility and agile services, products and technology within the retirement recordkeeping industry, as well as innovative plan design options. Greater use of Roth provisions and expanded access to employer-sponsored plans means plan sponsors and providers must be ready to handle increased account volumes and more complexity across their operations. The ability to incorporate QLACs to a greater extent opens the doors to broader use of guaranteed income products, increasing the importance of centralized product calculators and clearing mechanisms that can also support rollovers. In short, flexible personalized and agile technologies will be the key to managing retirement plans under SECURE 2.0.
To continue the discussion about the retirement reforms in SECURE 2.0, contact us.
Written by Chris Robino
Senior ERISA Counsel