SECURE 2.0 Has Passed…Now What?

As a holiday gift, Congress enacted the SECURE 2.0 Act of 2022 as part of the government funding bill. The legislation builds on the significant improvements to the retirement system that were enacted in SECURE in 2019.

As long-time advocates of policy that furthers retirement security, State Street has been following this legislation closely and working closely with policymakers in Congress. Here, we will recap the most significant provisions contained in the bill, emphasizing the fast-approaching plan decisions and process revisions that will need to be made in the coming years.

Extending Retirement Plan Access

In the coming years, the following provisions will help broaden savings plan options and inclusivity, allowing more Americans to participate in workplace plans and empowering greater retirement readiness.

• Extending Open MEPs to 403(b) Plan Sponsors

This provision allows unrelated employers who sponsor 403(b) plans, including educational, hospital, and charitable institutions to participate in a multiple employer plan – either a closed “MEP” or an “open MEP”, which is called a “PEP.”

This provision is effective for plan years beginning after December 31, 2022.

Of note: The original House Ways and Means Committee version of SECURE 2.0 included changes to the tax code and securities laws that would have expanded investment opportunities for 403(b) plan sponsors to include collective investment trusts. The final SECURE 2.0 bill includes the tax code changes only. State Street will continue to advocate for changes to securities law in 2023 to provide parity to 403(b) plan sponsors that may lower the costs for investing for sponsors and ultimately, participants, leading to greater retirement savings.

• Requiring All New Plans to Include Automatic Enrollment

Under current law, an employer may include automatic enrollment in their 401(k) or 403(b) plan. It is not a mandatory requirement.

Unless an exception applies (e.g.., employers with 10 or fewer employees, companies that have been in business for less than three years), the bill requires new 401(k) and 403(b) plans to automatically enroll a participant at a minimum initial rate of 3% of compensation. That rate must be increased, effective for the first day of each plan year starting after each completed year of participation in the plan, by 1% each year until it reaches at least 10% but no more than 15%.

The provision is effective for years beginning after December 31, 2024.

• Revising Long-Term Part-Time Worker Status From 3 Years to 2 Years

Under the SECURE Act, except in the case of collectively bargained plans, the bill required employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one-year service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service. SECURE 2.0 reduces the three year requirement to two years.

This provision is effective for plan years beginning after 2024.

• Revising Tax Credits for Small Employers Starting Plans

SECURE 2.0 increases the small employer startup credit from 50% of administrative costs to 100% for employers with up to 50 employees. For plans other than DB plans, an additional credit of up to $1000 per-employee is provided for employers with up to 100 employees (phasing out between 51-100 employees). This latter credit is a game changer for many companies and will result in total credits of close to $100,000 or more for some small businesses.

This provision is effective for taxable years beginning after December 31, 2022.

Increasing Savings Contributions

Sponsors can help employees bolster their savings foundation in 2023 and beyond through tactics to increase catch-up contributions and strategies for later-in-life contributions and drawdown.

• Making the Saver’s Credit a Federal Matching Contribution 

Current law provides for a nonrefundable credit for certain individuals who make contributions to IRAs, defined contribution plans, and ABLE accounts. The legislation replaces the credit paid in cash with a federal matching contribution that must be deposited into the taxpayer’s IRA or retirement plan. The match is 50% of IRA or retirement plan contributions up to $2000/individual.

The provision is effective for taxable years beginning after December 31, 2026.

•  Increasing Catch-up Contributions to $10,000 For Plan Participants Ages 60-63

Annual employee deferrals to 401(k), 403(b), and governmental 457(b) plans for 2022 generally are limited to $20,500, but individuals age 50 or older are allowed to make an additional “catch-up” contribution of up to $6,500 ($27,000 total).

The legislation increases the catch-up contribution limits to more than $11,000 (the exact number won’t be known until late 2024) for participants who have attained ages 60, 61, 62, and 63. The increased amounts are indexed for inflation after 2025.

The provision is effective for taxable years beginning after December 31, 2024.

• Changing the RMD Age from 72 to 75

SECURE increased the age for taking required minimum distributions from 70 ½ to age 72. SECURE 2.0 further increases the RMD age to 73 starting on January 1, 2023 and to age 75 starting on January 1, 2033.

Expanding Distribution and Spending Options

This category of provisions includes several key and quickly in-effect measures surrounding lifetime income, specifically regarding deeply deferred annuities (qualifying longevity annuity contracts or QLACs). These changes increase the amount that participants could allocate to a QLAC and thereby increase the level of guaranteed income achievable through these annuity contracts.

• Increasing Qualified Longevity Annuity Contract Limits and Permitting a “Free-Look” Period of 90 Days

QLACs are deferred annuities that begin payment at the end of an individual’s life expectancy. Because payments start later in life, QLACs are an inexpensive way for retirees to hedge the risk of outliving their savings in defined contribution plans and IRAs. Current Treasury regulations exempt from the minimum required distribution rules the lesser of 25% of the account balance or, currently, $145,000. SECURE 2.0 repeals the 25% cap and increases the dollar limit to $200,000 (indexed for inflation). In addition, the legislation clarifies that free-look periods of up to 90 days are permitted. These provisions are effective on date of enactment..

Boosting Financial Wellness

Many employees are unable to contribute to their retirement savings plans at work due to other savings obstacles such as having sufficient savings for emergencies or having to pay off student loans. The legislation addresses these obstacles to retirement savings with some innovative approaches.

• Providing Emergency Savings Options

The legislation provides two options for employers who might want to offer an emergency savings vehicle to their employees. Under one option, the 10% early distribution penalty would not apply for emergency withdrawals from a 401(k) plan or IRA up to $1000 with only one withdrawal permitted per year with no other additional withdrawals permitted for 3 years unless the money is repaid.

This provision is effective for withdrawals made after December 31, 2023.

The second option permits employers to offer pension-linked emergency savings accounts to their non-highly compensated employees. Employers can automatically opt their employees into the accounts at no more than 3 percent of salary with a dollar cap of $2500. Contributions are made on a ROTH basis and are treated as elective deferrals for purposes of retirement matching contributions.

• Increasing Savings Opportunities for Workers with Student Loan Debt by Permitting Employers to Make Matching Contributions While the Worker Pays Off the Loan
  Under 401(k) plans, it is common for employers to make matching contributions on behalf of employees who contribute to the plan. Because of student debt obligations, however, an employee might not be able to afford to make any contributions to the plan, and would forgo any employer matching contributions.

SECURE 2.0 permits employers to make matching contributions under a 401(k) plan, 403(b) plan, governmental 457(b) plan, or SIMPLE IRA with respect to student loan repayments.. The provision is permissive for employers to adopt and is effective for contributions for plan years beginning after December 31, 2023.

At the four-way intersection of access, saving, spending, and financial wellness is an opportunity to powerfully and positively change the way participants and plans prepare for and experience retirement. We are excited by the progress this bill portends and will continue to champion policy that propels better retirement outcomes.