A recent piece of bipartisan legislation aims to expand retirement plan coverage and to encourage saving for retirement. Introduced in late October by the United States House Committee on Ways and Means, The Securing a Strong Retirement Act of 2020 (SECURE Act 2) builds upon the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which took effect January 1, 2020.
The SECURE Act 2 would allow plan sponsors to provide new incentives to employees to take advantage of retirement plans, as well as provide greater financial flexibility to plan participants. These changes would come with additional compliance and administrative requirements that plan sponsors would weigh when considering implementation. This article examines several of the most important potential changes for plan sponsors and participants to consider.
CONSIDERATIONS FOR EMPLOYERS AND PLAN SPONSORS
Expanded Automatic Enrollment
The SECURE Act 2 would require certain 401(k), 403(b), and SIMPLE (Savings Incentive Match Plan for Employees) plans to adopt an automatic enrollment feature. The initial automatic enrollment would be at a contribution rate between 3% and 10% and would increase annually by 1% until the 10% limit is reached. Individual plan participants would be permitted to opt-out of an automatic enrollment feature. However, the proposed legislation cites several studies showing that even with an opt-out option, plans using automatic enrollment dramatically increase participation among younger and lower-paid employees. This requirement would be effective for newly established employee benefit plans. Existing plans would be exempt from the mandatory implementation of an automatic enrollment feature. Exceptions to this requirement also exist for businesses with 10 or fewer employees, businesses with less than three years of existence, church plans, and governmental plans.
Implementation of automatic enrollment and automatic contribution rate increases can result in increased opportunities for inadvertent mistakes in plan administration. To ease this administrative burden, the SECURE Act 2 would allow employers a grace period to correct errors before being subject to penalty. Provided that correction of an administrative error would favor the plan participant, employers would have nine-and-a-half months after the end of the plan year during which the mistake was made to correct the matter.
More Options for 403(b) Plans
403(b) plans offer tax-advantaged investment options to employees of not-for-profit entities, public schools, and churches. Currently, these retirement plans are not permitted to hold investments in collective investment trusts, and instead, are generally limited to annuity contract and mutual fund investments. Section 104 of the proposed bill would permit 403(b) plans to invest in collective investment trusts in circumstances where: the plan is subject to ERISA (the Employee Retirement Income Security Act), the plan sponsor has fiduciary responsibility for investments available to participants, or the 403(b) plan is governmental. Collective investment trusts often have lower fees than other investments available to 403(b) plans. Lower cost investment options can increase investment returns for plan participants. These changes would also permit 457 plans, which are often available to the same employers sponsoring 403(b) plans, to offer the same investment options available to participants across plan types. This could potentially ease some administrative burdens on retirement plan committees with fiduciary responsibility for selecting the investments from which participants can choose under the plan.
Beginning in 2020, the SECURE Act modified multiple employer plans (MEPs) to allow employers with no relationship to join a MEP through participation in a pooled employer plan (PEP). A PEP has one plan document and is subject to a single plan audit, which can greatly reduce costs for participating employers. Previously, participation in MEPs was limited to employers that shared some commonality—for example, the same industry or geographic location, or use of the same professional employer organization. MEPs are commonly used by small- and medium-sized entities to reduce—through economies of scale—both the costs and administrative burden of offering a retirement plan to employees. Additionally, the SECURE Act eliminates the “one bad apple” rule. Under this rule, a regulatory violation or misconduct by one employer participant could jeopardize all plan employers, subjecting them to IRS or Department of Labor repercussions.
Under current law, the previously outlined changes are limited to certain types of employee benefit plans and do not apply to 403(b) plans. The SECURE Act 2 would open these same benefits, currently available to for-profit employers, to employers eligible for 403(b) plans. Under the proposed changes, 403(b) plans would be provided the same relief—currently available to for-profit MEPs—from the one bad apple rule so that the violations of one employer do not impact compliant 403(b)-eligible employers.
Incentives to Encourage Employee Contributions
The proposed legislation offers two modifications to current laws in order to increase contributions to retirement plans. First, under current law, employers are generally prohibited from providing immediate financial incentives to encourage employees to enroll in and contribute to 401(k) or 403(b) plans. The SECURE Act 2 would permit employers to offer small immediate financial incentives, such as gift cards, to incentivize this behavior.
Second, the SECURE Act 2 contains provisions that would permit employers to make matching contributions to a 401(k), 403(b), 457(b), or SIMPLE IRA plan by treating payments on qualifying student loans as retirement plan contributions. Employees with student debt may forego saving for retirement while paying off student loans. This change could still offer an avenue for employees making student debt payments to receive an employer matching contribution. The legislation would require matching contributions on student loan payments to be at the same rate as that of traditional employee deferral contributions. Also, the same vesting requirements would need to be in place for matching contributions on both eligible student loan payments and employee deferral contributions.
Increased Tax Credits for Plan Sponsors
The SECURE Act 2 proposes to expand on certain small employer tax credits first implemented via 2019’s SECURE Act, which provided for a tax credit equal to 50% of the costs of starting a retirement plan. This is available to employers with 100 or fewer employees. Under the 2019 legislation, the amount of the credit is limited to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees eligible for plan participation or (b) $5,000. This credit is available for up to three years.
For employers with no more than 50 employees, the proposed SECURE Act 2 legislation would double the amount of start-up costs eligible for the credit from 50% to 100%. Additionally, the amount of the credit would be limited to $1,000 for each employee participating in the plan, representing an increase over the formula described in the preceding paragraph. Employers of between 51 and 100 employees would still be eligible for the credit, but it would be reduced by 2% for each employee exceeding 50. Regardless of employee count, the maximum available credit would be phased out over a five-year period, with a 100% credit available in the first and second years, 75% in the third year, 50% in the fourth, and 25% in the fifth.
CONSIDERATIONS FOR PLAN PARTICIPANTS AND INDIVIDUALS
Greater Flexibility in Saving for Retirement
The SECURE Act 2 proposes several options plan participants can take advantage of to fit their overall retirement needs. The proposed legislation presents two potential opportunities for participants to allocate more income to tax-advantaged accounts as they approach retirement age. First, catch-up contributions to certain retirement accounts including 401(k), 403(b), and governmental 457(b) plans would be increased to $10,000 per year for participants age 60 and older. Catch-up contributions allow a participant to make an elective deferral beyond the base contribution limit available to all eligible employees of a retirement plan. During 2020, the catch-up contribution is limited to $6,500 for employees age 50 and older. The proposed change would implement a tiered catch-up contribution threshold. Tier one would be consistent with current legislation and permit catch-up contributions beginning at age 50. When a participant reaches age 60, the second tier would allow for an increased catch-up contribution. The SECURE Act 2 would also adjust these limits annually for inflation.
Current legislation allows catch-up contributions of $1,000 per year to individual retirement accounts (IRAs) for individuals age 50 and over. This amount is not currently indexed with inflation. The SECURE Act 2 would link the IRA catch-up contribution amount to inflation, allowing individuals closer to retirement age to save more through an IRA.
More Options for Withdrawing Funds From Tax-Advantaged Accounts
In order to allow plan participants and individuals to keep more of their savings in retirement plans for a longer period, the SECURE Act 2 proposes to increase the required beginning age for mandatory distributions. Under current law, required minimum distributions (RMDs) from employer-sponsored defined contribution plans and traditional IRAs generally begin at age 72. The proposed legislation would defer this by three years to age 75, providing more flexibility in retirement planning, if needed. Individuals with retirement account balances of $100,000 or less upon reaching the required minimum distribution age would be exempt from taking RMDs.
PYA IS HERE TO HELP
While the changes proposed in the SECURE Act 2 are designed to incentivize participants in employee benefit plans, reduce the administrative burden on plan sponsors, and provide financial flexibility to plan participants, planning for these changes can be complex. PYA is here to help you understand and plan for this legislation and help determine how it could impact your employer-sponsored plan audit. If you have questions or need assistance, contact a PYA executive below at (800) 270-9629.