SECURE Act 2.0: Details on Retirement Bill Passed by the U.S. House of Representatives
The U.S. House of Representatives passed a bill — Securing a Strong Retirement Act of 2022 — on March 29, 2022, by an overwhelming bipartisan vote, 414-5. The bill, referred to as SECURE Act 2.0, is currently before the Senate for consideration.
Before becoming a law, all differences in the bill would need to be reconciled, which includes sending it back to the House of Representatives to consider changes and then another vote in that chamber before heading to President Biden for signature. Taking these facets into consideration creates an uncertainty on timing of if or when this bill might become law.
SECURE Act 2.0 is the second phase by Congress to offset the retirement savings crisis in the United States. The initial phase, Setting Every Community Up for Retirement Enhancement (SECURE) Act, went into effect Dec. 27, 2019.
Possible Provisions of SECURE Act 2.0
SECURE Act 2.0 is an attempt to build on the initiatives already started to help a wide range of Americans achieve retirement security and financial wellbeing. It has provisions that include more changes to Required Minimum Distribution (RMD), automatic enrollment, and incentives for plan startup. First, let’s take a quick look at how it may affect your employees.
Changes to Benefit a Multigenerational Workplace
Today’s workplace is more generationally diverse than ever. Older employees are working longer, and Millennials make up roughly one-third of the American workforce. The SECURE Act 2.0 addresses these age groups.
For older employees, the bill would raise the required minimum distribution (RMD) age 72 to 75 — with a phase-in option through 2033 to reach the upper age limit — so they can save for longer. There is also a new catch-up contribution proposed: limits for 401(k) and 403(b) plans would increase to $10,000, while SIMPLE plans would increase to $5,000 (both indexed) for individuals who have reached the ages of 62, 63, and 64.
For younger employees, the SECURE Act 2.0 aims to address two crises: retirement savings and student loan debt. Instead of contributing to a 401(k) or other type of retirement plan, employees can opt to make contributions that go toward paying off their student loans. These contributions would still be eligible for employer matching.
Since today’s workforce includes more part-time workers, they now would be eligible for an employer-sponsored retirement plan. The Act would require employers to allow long-term, part-time workers to defer to their 401(k) plans. Part-time employees would be required to work two consecutive years and complete at least 500 hours of service in each year, a change from the original SECURE Act’s three-year rule. The bill also proposes to simplify and increase the “Savers Credit” which provides millions of low and middle-income individuals with an incentive to save for retirement each year.
Automatic Enrollment to Encourage Participation
Automatic enrollment in a retirement plan is designed to make it easier for employees to participate. The bill would require smaller businesses with 401(k) and 403(b) plans automatically enroll employees. Employees who prefer not to participate can opt out. The initial enrollment amount is 3 percent with an incremental increase of 1% annually until the limit of 10% is reached. There is an exception for small businesses with 10 or fewer employees, new businesses less than 3-years-old, churches, and government agencies. To add even more convenience, businesses could integrate automatic enrollment with payroll.
Increased Tax Credits for Small Business Start-ups
For start-up businesses with up to 50 employees, the current tax credit is equal to 50% of administrative costs, capped annually at $5,000. Under proposals in SECURE Act 2.0, the 50% would be increased to 100% for those businesses.
In addition, the bill would give employees a $1,000 tax credit in the first year of a defined contribution plan, phased down gradually over five years.
Reduced Penalties to Make Compliance Easier
Being compliant with tax regulations can be a challenge for businesses. As currently written, SECURE Act 2.0 would allow businesses and taxpayers to avoid harsh penalties for inadvertent errors within the grace period. It would also protect retirees who unknowingly receive retirement plan overpayments.
SECURE Act 2.0 is still only a bill and not law. Paychex will continue to monitor its progress and provide updates when available. In the meantime, contact a Paychex retirement specialist to learn how your business can take advantage of the original SECURE Act and Paychex Retirement Services.