In March 2022, the U.S. House of Representatives approved the SECURE Act 2.0, a bill that will revise the rules for contributing to and withdrawing from retirement savings vehicles if passed by the U.S. Senate. Since the SECURE Act 2.0 has a similar version in the Senate, the two bills will likely combine as the Senate votes the SECURE Act 2.0 into law.
Since employers are responsible for following retirement savings plan rules, they should familiarize themselves with the SECURE Act 2.0’s proposals. Here are four ways the Act will impact employers if it becomes law:
- Employers are responsible for automatic employee enrollment-
Employers must automatically enroll employees at a 3% contribution rate, but employees can opt-out, save less, or save up to their IRS contribution limit each year.
If an employee has not made an investment election, contributions default into a qualified default investment alternative (QDIA), such as a target-date fund, balanced fund, or a managed account.
What employers are exempt?
- Employers with fewer than ten employees
- Employers opened less than three years ago.
- Retirement plans for churches and government agencies
- Employers with a 401(k) or 403(b) plan in place before the enactment of SECURE 2.0
- Employer matches have new rules-
Employees can now determine where the employer’s match goes. Employees can pick either their 401(k) Roth or pre-tax retirement savings account to receive their employer’s match. Before SECURE Act 2.0, all employer matching dollars must deposit into the employee’s pre-tax retirement savings account.
Employees with student loans benefit. Under the SECURE Act 2.0, employees don’t need to contribute to their employer-sponsored retirement plan to receive the employer match as long as they make monthly payments against their student loan debt.
- Employee catch up provisions are changing-
401(k) and 403(b) catch-up provisions increase for employees’ ages 62, 63, or 64. Employees over age 50 enrolled in a 401(k) or 403(b) can contribute $6500 more for 2022, but the SECURE Act 2.0 provides a more significant boost of $10,000 in catch-up contributions to investors at these specific ages.
Catch-up contributions must be made into a 401(k) Roth IRA. Employees must make their catch-up contributions into their 401(k) Roth account starting in 2023 (in the house version). Currently, the employee can decide which account they want their catch-up contributions to go toward, either the Roth IRA, 401(k), or 403(b).
Catch-up limits for 401(k) Roth owners ages 50 and older would be indexed for inflation. Since 2006, the $1000 extra hasn’t increased, regardless of inflation.
- Changes for plan participants (employees)-
Employee contributions will automatically increase. Each year, an employee’s contributions will automatically increase by 1% up to a maximum of 10%, but not to exceed 15% of the employee’s pay.
Part-time workers can contribute after two years. 401(k) plan participation eligibility moves from three to two years as SECURE Act 2.0 shortens the timeline for part-time workers to participate in their employer’s retirement savings plan.
Additional SECURE Act 2.0 provisions impacting employers-
- Creation of an online Retirement Savings Lost & Found Databaseat the Department of Labor for workers and retirees to find “lost” retirement accounts left at former employers that may have gone out of business or merged with another organization.
- Create tax creditsof up to $1,000 per employee for small businesses that offer a retirement savings plan.
- Expanded employer self-correction opportunities,including participant loan errors and employee elective deferral failures.
- Extend to 403(b) retirement planssome of the design features of 401(k) plans.
- Eliminate specific barriers to offering lifetime income annuitiesas a retirement plan investment option.
- Allow nonprofits to join together to offer defined-contribution multiemployer plans to their employees, as for-profit employers were allowed to do under the original SECURE Act.
Source- “House Passes ‘SECURE Act 2.0,’ Requiring Automatic Enrollment in Retirement Plans,” SHRM.
If you are an employer, keep informed of the SECURE Act 2.0’s progress in the U.S. Senate by contacting your financial professional or retirement plan administrator. The SECURE Act 2.0’s timeline for implementation of some provisions at employers may be yet this year, while others will start in 2023.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
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Commentary provided by James Hendries, LPL Financial Advisor
Huntington Beach, CA