The SECURE Act 2.0: Saving More for Retirement
In late March, the U.S. House of Representatives passed the Securing a Strong Retirement Act of 2022 to bolster Americans’ retirement savings. There is strong bipartisan support for enhancing retirement income security for American workers, and these discussions are definitely timely as the pandemic profoundly alters, and even redefines, work. Over the last two years, millions of workers changed jobs – some became entrepreneurs, others took on independent contractor roles, and still others moved to part-time positions; all of them may no longer be covered by their workplace retirement plans. In addition, the most recent Social Security Trustees’ report shows the pandemic has had negative impacts on the trust fund balances. Against this backdrop, this blog post reviews key provisions of the retirement bill passed by the House and their impacts on workers.
The Securing a Strong Retirement Act of 2022, as well as a very similar bill, was first introduced in 2020. It builds on the framework of the last major retirement savings package, Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in December 2019, just before the pandemic. Because of this legislative history, the 2022 bill is often referred to as the SECURE Act 2.0. Despite working longer, a fair portion of Americans are not financially prepared for retirement. As such, the overarching idea of the bill is to provide more options and make retirement saving more accessible to all workers. Lawmakers believe such flexibility will enable workers to start saving earlier and across longer durations; the revisions also make it easier for workers to save during all stages of life.
The most critical developments in SECURE Act 2.0 focus primarily on expanding coverage and increasing retirement savings. The original SECURE Act includes several provisions that altered the rules governing tax-preferred retirement saving plans, and the current bill further advances these rules. For instance, the SECURE Act increases the age a taxpayer needs to reach to start taking the required minimum distribution (RMD) from their IRAs from 70 1/2 to 72, and the SECURE Act 2.0 proposes to further increase the RMD age to 73 in 2023, 74 in 2030, and 75 in 2033. This provision allows workers to keep retirement funds in their accounts longer, which benefit both workers who decide to work longer and workers with solid savings who do not need to make IRA withdrawals. The Joint Committee on Taxation (JCT) estimates this provision would reduce revenue by $9.6 billion over the 2022 to 2031 period.
Under current rules, if one fails to take the full RMD, a 50% excise tax will be imposed on the shortfall. The SECURE Act 2.0 proposes to reduce the tax to 25%, with a mechanism to further reduce to 10% if a taxpayer corrects the issue in a timely manner.
The proposal also allows higher catch-up contributions for workers age 62-64, from the current $6,500 to $10,000 per year. However, all of these catch-up amounts need to be Roth designated, meaning that workers have to pay taxes as they contribute funds. In addition, the bill proposes to provide an option that allows employees to allocate their employers’ matching contributions as Roth contributions. These provisions will accelerate the timing of revenue collection to help finance the SECURE Act 2.0: Collectively, JCT estimates tax revenue would increase by $35 billion over the next decade. However, withdrawals including the principal and capital gains from Roth-type accounts are tax free after the upfront payment of taxes.
For part-time workers, the SECURE Act requires that if an employee works for a company for three years and at least 500 hours each year, the worker will be able to participate in the employer’s retirement program. Because the provision became effective in 2021, the first group of part-time workers would become eligible in 2024. The SECURE Act 2.0 proposes to shorten the vesting period to two years, meaning that the first group of eligible workers will qualify in 2023.
Although there has long been debate about whether limitations on early withdrawals from retirement savings should be more restrictive or relaxed, both the SECURE Act and the SECURE Act 2.0 provide additional flexibility for early withdrawals. The original SECURE Act expanded access to retirement savings by allowing penalty-free withdrawals for the birth or adoption of a child. The 2022 bill allows an employer to rely on an employee’s self-certification stating that he or she experiences economic hardship and therefore needs to withdraw from his or her work-related retirement savings.
Certain provisions in the SECURE Act 2.0 are new. A major change is that the proposal would require newly established workplace plans to automatically enroll employees when they are eligible. It requires a minimum 3% initial contribution and increases by 1% annually until it reaches 10% of payroll, unless participants opt out of the auto-enrollment and auto-escalation features. The JCT estimates this provision would reduce revenue by $5.2 billion between 2022 and 2031.
In addition, the proposal will codify a provision long advocated by student loan relief supporters. Specifically, employer plans such as the 401(k) and 403(b) will be allowed to match participants’ student loan payments similar to those of retirement plans. In other words, employees with student loan balances can pay down student loans instead of contributing to the retirement plans while still benefiting from employers’ matching contribution. The JCT estimates this provision will reduce revenue by $1.9 billion between 2022 and 2031.
One provision that is intended to incentivize low- to middle-income workers’ retirement savings is the Saver’s Credit, a tax credit applicable to both IRAs and workplace plans such as 401(k) accounts. This program provides a credit of up to $2,000 for joint filers and $1,000 for single filers at credit rates from 10% to 50%, depending on a taxpayer’s adjusted gross income (AGI). The SECURE Act 2.0 proposes to have a single 50% credit, and raises the AGI to make the 50% credit available to higher income taxpayers than under the current law ($24,000 for single filers and $48,000 for joint filers, whereas the current law has $20,500 and $41,000 as the thresholds, respectively). The JCT estimates this provision is expected to cost $7.6 billion over a decade.
The SECURE Act 2.0 also includes certain simplification and clarification procedures. A new mechanism is the “retirement savings lost and found.” As workers change jobs, it could be hard for them to locate former employers due to business entity changes or acquisitions. Similarly, it is not always easy for employers to locate former workers because of name or address changes. The SECURE Act 2.0 plans to establish a national on-line lost-and-found database for retirement plans, administrated by the Department of Labor. This database will simplify the process for both employers and employees to track their retirement plans.
In addition, current rules allow individuals age 70½ and older transfer up to $100,000 tax-free each year from their traditional IRAs directly to charity. These transfers, called qualified charitable distributions (QCDs), are considered RMDs. These amounts are not counted as an account owner’s taxable income and therefore are not part of the charitable contribution deduction. However, the QCDs need to be directed to charity – transfers to a donor-advised fund or other split interest arrangement are not considered QCDs. The SECURE Act 2.0 proposes to index the $100,000 limit, and allow a one-time QCD transfer of up to $50,000 to split interest entities such as charitable gift annuities or charitable remainder annuity trusts. The JCT estimates this provision would cost $2 billion from 2022 to 2031.
Beyond the SECURE Act 2.0
The reactions to the SECURE Act 2.0 are generally positive; it does not contain controversial provisions like eliminating the stretch IRA, and it is overall revenue neutral. In fact, the JCT estimates the SECURE Act 2.0 will raise $93 million in revenue in a decade, primarily through Roth catch-up and optional employer matching contributions. However, some observers are concerned as to whether certain provisions will be effective. For instance, some argue that retirement savings tax benefits for small businesses have long been available but not widely utilized; therefore, they are not sure if additional tax benefits will be impactful. Others worry that the Saver’s Credit may similarly have limited effects because the take-up rate has been low. Some researchers are encouraged by the inclusion of automatic enrollments, but they believe the bill falls short of offering a full automatic IRA.
The House version of the SECURE Act 2.0 has been referred to the Senate. Although the bill has significant bipartisan support in the House (it passed with a wide 414-5 margin), the Senate is expected to modify certain provisions. Senators may rely on their previously introduced Retirement Security and Savings Act of 2021 as a starting point, obtaining ideas from the committee hearing, or developing other new ideas to safeguard Americans’ retirement income security. No matter what the final bill includes, the package is expected to refine the SECURE Act and provide more incentives for American workers to save for retirement.
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