by Joseph P. Trybula, CFP®, AIF®, Diversified Financial Advisors
In 2019, The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. While it is likely the most well-known of the retirement bill, in recent years, two other significant retirement bills were introduced in the 116th Congress as well. These are the Retirement Security and Savings Act, introduced in May 2019, and the Securing a Strong Retirement Act, introduced in October 2020.
While neither of these bills received a vote in the 116th Congress, improving the retirement system has always gathered bipartisan support and the new Congress, the 117th, likely will have these bills on their agenda.
How will these bills impact participants in employer retirement plans?
Each of the bills introduced contain main provisions aimed at improving retirement security for Americans. Below is a summary of some of the key provisions the bills contain:
Enhance the new plan startup credit for small employers.
The SECURE Act increased an existing tax credit to 50% of the costs of starting a plan to a maximum credit of $5,000 per year for three years for employers with 100 or fewer employees. Before this SECURE Act change, which became effective in 2020, the maximum credit was $500. The Neal-Brady bill would increase the credit to 100% for employers with 50 or fewer employees.
Provide tax credits for plan contributions made by small employers.
Employers with up to 50 workers that establish a plan would be entitled to a credit for contributions made on behalf of their employees. The maximum credit per employee would be $1,000 in the first two years, $750 in the third, $500 in the fourth and $250 in the fifth. The credit amount would be phased out for employers with between 51 and 100 employees.
Enhance the Saver’s Credit.
Currently, a tax credit of up to $1,000 is available to low and moderate income workers who contribute to their employer retirement plan. Both bills would increase the income limits, making more retirement savers eligible for the credit. The Neal-Brady bill would increase the credit amount to $1,500. Under the Portman-Cardin bill, even savers who owe no federal tax would be able to claim the credit.
Require new plans to include auto enrollment and auto escalation.
New 401(k) plans would be required to automatically enroll employees at a starting rate of at least 3% of their pay and annually increase the rate by 1% until it reached 10%. Employees could opt out. Some exceptions would apply, including businesses with no more than 10 employees and organizations that have been in business for less than three years. Existing plans would be grandfathered.
Increase the catch-up amount for individuals age 60 or over to $10,000.
Currently, participants 50 or older can make catch-up contributions to their 401(k) plans. The catch-up limit for 2021 is $6,500. The bills would raise the limit to $10,000 for participants 60 or older.
Increase the starting age for required minimum distributions (RMDs) to 75.
The SECURE Act raised the age at which retirement plan distributions must begin from 70½ to 72. These bills would push off the starting age by three more years.
Exempt individuals with balances under $100,000 from the RMD rules.
Under both bills, individuals whose aggregate balances in IRAs and employer plans (other than defined benefit plans) did not exceed $100,000 would not be required to take distributions.
Permit qualified charitable distributions from qualified plans.
Under current law, individuals 70½ or older can directly transfer tax-free up to $100,000 per year from an IRA to a 501(c)(3) charitable organization. The bills would expand this provision to include distributions from employer plans, including 401(k)s.
Reduce the penalty for failing to take required minimum distributions.
The bills would lower to 25% the current 50% excise tax for failing to take an RMD from a plan or IRA.
Require long-term, part-time employees the option to join 401(k)s sooner.
The SECURE Act will require employers to permit employees who work at least 500 hours in three consecutive 12-month periods to contribute to their 401(k) plans beginning in 2024. The bill would shorten the three-year requirement to two years.
Create a retirement savings “lost and found.”
The bill would establish an online mechanism that would enable individuals to search for lost retirement accounts.
Permit matching contributions on behalf of employees who are repaying student loans.
Many employees miss out on employer-matching contributions for retirement because they are paying off student loans. The bills would permit employers to make matching contributions to 401(k) plans for the benefit of these employees.
Time will tell.
Only time will tell what provisions will actually be included in the final package, but it is likely many of these provisions, along with additional proposed changes, could be included in a comprehensive “SECURE 2.0” package.
Contact Joe Trybula at [email protected] or 800.307.0376 for more details.
Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. Investment Advice and 3(38) Investment Fiduciary services offered through Diversified Financial Advisors, LLC, a Registered Investment Advisor. 3(16) Administrative Fiduciary Services provided by PISTL Service Corporation. Discretionary Trustee services provided by Printing Industries 401k Trustees. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.