Proposed Retirement Plan Legislative Changes

Collectively known as SECURE 2.0

There are three (3) bills that could have significate changes for retirement plans:

 

  • The Securing a Strong Retirement Act of 2022, which the House passed 414-5 in March of 2022 (H.R. 2954)

 

  • The Retirement Improvement and Savings Enhancement to Supplement Health Investments for the Nest Egg (RISE & SHINE) Act of 2022 (S.4353). The Senate Health, Education, Labor, and Pension (HELP) Committee reported out unanimously on June 14, 2022

  • The Enhancing American Retirement Now (EARN) Act, which the Senate Finance Committee reported out unanimously on June 22, 2022

 

These bills are working their way through Congress now. Many of the provisions are similar, the theme is to encourage workers to save more for retirement. CiR will keep you updated. 

 

Enhanced Savings Incentive Proposals:

 

  • Requirements for automatic enrollment, automatic escalation, and automatic re-enrollment.

    • One bill would require all new 401(k) and 403(b) plans to have automatic enrollment and automatic escalation.

    • A different bill would require auto-re-enrollment every three years for plans first adopting auto-enrollment in the future.

 

  • Introduce a new automatic enrollment safe-harbor plan with higher automatic electives.

    • One bill adds a new auto-enrollment safe harbor with higher minimum and maximum automatic contribution percentages and higher match requirements than those that apply under the current automatic enrollment safe harbor. The safe harbor allows the plan to avoid certain non-discrimination testing rules.

 

  • Allow plans to make matching contributions based on student loan repayments. The bills include a provision allowing 401(k), 403(b), and governmental 457(b) plans to treat a student loan payment as an elective contribution for purposes of triggering matching contributions. There are related changes to the nondiscrimination rules.

 

  • Allow emergency savings. The bills include two approaches to employers setting aside small amounts of money for financial emergencies.

    • One approach is a “sidecar” to a 401(k) or ERISA 403(b) plan (max of $2,500).

    • The other approach is a new distribution rule allowing participants to take a small amount ($1,000) out of their 401(k), 403(b) or governmental 457(b) plan.

    • It’s possible that the final bill will include both approaches with amendments so that the provisions work for both the IRC and ERISA. 

  • Permit older participants to make higher catch-up contributions. Current law allows older workers to make catch-up contributions of up to $6,500 to certain plans starting at age 50.

    • The bills would increase the yearly amount to $10,000 for certain older workers (ages 60–63 in one bill and ages 62–64 in another).

 

  • Revise the definition of “long-term, part-time workers.” The SECURE Act changed minimum participation standards for non-collectively bargained 401(k) plans so that the plan is required to allow long-term, part-time workers to make elective contributions. The SECURE Act defined “long-term” as participants who have 500 hours in each of three years.

    • The bills would change that to two years, eliminate the need to retroactively trace vesting credit, fix some technical issues and add a parallel ERISA provision.

 

  • Require or allow certain contributions to be Roth contributions. Employee Roth contributions, rather than pre-tax contributions, move the budget cost outside of the 10-year budget window used for testing the cost of legislation. The bills vary, but items permitted or required to be treated as Roth contributions include catch-up contributions and, if the employer allows and the employee elects, employer matches and employer non-elective contributions.

 

Enhanced Distribution Changes:

 

  • For Required Minimum Distributions (RMDs) Increase the required beginning date (RBD) age.

    • Under one bill, the RBD age would increase to 75 starting in 2032.

    • Another bill would increase the RBD age to 75 in 2033 with interim increases to age 73 in 2023 and to age 74 in 2030

 

  • Reduce the penalty tax for RMD failure.

    • The bills would reduce the penalty tax on participants who fail to take RMDs from 50 percent to 25 percent.

    • If the failure is corrected in a timely manner, the tax is reduced to 10 percent.

 

  • Waive the penalty tax for terminally ill individuals and long-term care distributions.

    •  The 10 percent early withdrawal tax on distributions would not apply in the case of a distribution to a terminally ill participant (after doctor certification) nor to distributions from retirement plans used to pay for qualified long-term care contracts for participants and spouses.

 

  • Allow the surviving spouse to elect to be treated as the employee. The surviving spouse of a participant who dies before commencing RMDs would be allowed to elect to be treated as the employee for RMD purposes; thereby delaying when RMDs must commence.

 

  • Eliminate pre-death RMDs from in-plan Roth accounts. Roth IRAs are not subject to the RMD rules if the IRA holder dies before the required beginning date (RBD). This provision would apply this same rule to Roth accounts in 401(k), 403(b) and governmental 457(b) plans.

  • Clarify definition of a multi-beneficiary trust. The bills provide that a trust established for a chronically ill or disabled eligible designated beneficiary shall not be considered a multi-beneficiary trust, for purposes of post-death distributions, solely because the trust includes a charity as a beneficiary in addition to the spouse.

 

Other Proposed DC Plan Changes

The bills include many other provisions that would affect DC plans, including these:

 

  • Permit self-certification of hardship to simplify administration.

    • The bills would allow plans to let participants self-certify that they had a hardship event. Participants can already certify the other component of hardship eligibility: financial need. The Treasury Department may provide that a plan cannot accept self-certification if the plan has actual knowledge of the falsehood of the certification.

 

  • Limit notices that unenrolled participants must receive.

    • The bills would allow a DC plan to eliminate all notices to “unenrolled” participants (i.e., participants who do not elect to participate for a year and have no existing account balances) other than the basic election notice and other standard notices, such as the SPD. The bills would instruct the federal agencies to issue a regulation within two years.

 

  • Limit qualified birth or adoption distribution repayments to three years.

    • The bills would limit the repayment period to three years; it is currently unlimited.

 

  • Withdrawals related to domestic abuse could be made without a penalty.

    • No distribution restriction or 10 percent premature distribution penalty would apply to a distribution taken from a DC plan because of domestic abuse. The limit would be $10,000 or 50 percent of the account, if less. The amount could be repaid within three years.

    • There does not appear to be a requirement that a plan include a specific provision allowing such distributions. However, participants could take advantage of the premature distribution relief if they satisfy the domestic abuse standard and are eligible to take a distribution for another reason.

 

  • Increase the cash-out amount. The bills would increase the non-consent cash-out limit, now $5,000.

    • Two of the bills would raise the limit to $7,000.

    • The other bill would increase it only to $6,000.

 

  • Legislate automatic disaster relief. The CARES Act made emergency changes to in-service distribution rules and loans.

    • These bills include automatic changes in the disaster distribution and loan rules similar to the changes made under the CARES Act, so that no Congressional action would be needed for future disasters.

 

  • Allow retroactive amendments until tax filing date. This provision would allow retroactive amendments increasing benefits (except matching contributions) to be made up to the plan’s tax-filing date. Currently, the requirement is that these retroactive amendments must be made by the end of the plan year.

 

  • Permit mixed-performance benchmarks for investments.

    • The DOL has rules limiting permissible benchmarks for disclosure of mixed-asset investments, such as target date funds.

    • The provision would require the DOL to allow mixed benchmarks.

 

  • Require an annual paper benefit statement. Existing DOL regulations carve out several exceptions allowing benefit statements to be delivered electronically.

    • One bill narrows these exceptions to require at least one paper notice before electronic notices can be provided unless certain conditions are met. For active participants, the plan would be required to provide a one-time written notice advising participants of their right to request paper statements. For separated participants, the plan would be required to furnish the participant at least one paper statement each year unless the participant asks to receive statements electronically.

 

While the effective dates of most provisions would be earlier (some as early as 2023), the bills would not require plan sponsors to make amendments that conform with plan operation until later — generally the end of the 2024 plan year. The bills also provide extended anti-cutback relief tied to the amendment date. Similar changes would be made amendments to the SECURE Act, the CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (so that there is a coordinated amendment date). Because SECURE 2.0 is likely to be enacted late in 2022, employer groups are asking the Treasury to extend the amendment date by notice or other type of guidance.