Key proposed provisions of ‘SECURE 2.0’

Editor: Mark Heroux, J.D.

The Securing a Strong Retirement Act of 2022, H.R. 2954, also called “SECURE 2.0,” is the most prominent recently proposed legislation concerning retirement plans. It builds upon changes enacted by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, P.L. 116-94. In addition, the Senate introduced its own version of the legislation, S. 4353, formally known as the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act of 2022. This item discusses a few key provisions of SECURE 2.0 and differences between it and the RISE & SHINE Act.

SECURE 2.0 was introduced May 4, 2021, by Rep. Richard Neal, D-Mass. It received bipartisan support and was passed by the House on March 29, 2022, by a vote of 414–5. This bill focuses on three main areas: expanding coverage and increasing retirement savings, preserving income, and simplifying and clarifying retirement plan rules.

Some key provisions of the bill are:

Title I: Expanding coverage and increasing retirement savings

For plan years beginning after Dec. 31, 2023, automatic enrollment in 401(k) and 403(b) plans would be required once an employee is eligible. The minimum contribution percentage begins at 3% and increases by 1% annually until reaching 10%, but employees can elect out of the increase. Exceptions apply for SIMPLE plans, plans established or contracts purchased before the date of enactment, certain multiemployer plans, and governmental and church plans, as well as new business and small business plans (Title I, §101).

For tax years beginning after Dec. 31, 2022, there is a proposed increase to the Sec. 45E small employer pension plan startup cost credit for certain smaller employers. An eligible employer with no more than 50 employees may claim up to 100% of qualified startup costs. There is an additional credit for employer contributions by certain eligible employers. The allowed credit is increased by a percentage of employer contributions to an eligible plan. This credit amount may not exceed $1,000 per employee and is phased out if the number of employees exceeded 50 in the prior tax year (Title I, §102).

A focus is placed on increasing public awareness of the Sec. 25B qualified retirement savings contributions, or “saver’s,” credit, and its currently tiered applicable percentages based on adjusted gross income (AGI) are modified to a single percentage of 50%, subject to a higher AGI phaseout range, for tax years beginning after Dec. 31, 2026 (Title I, §§103 and 104).

The applicable age for required minimum distributions (RMDs) is increased from the current 72, based on the taxpayer’s date of birth, as follows:

• For an individual who attains age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2030, the applicable age is 73.
• For an individual who attains age 73 after Dec. 31, 2029, and age 74 before Jan. 1, 2033, the applicable age is 74.
• For an individual who attains age 74 after Dec. 31, 2032, the applicable age is 75.

This gradual increase applies to RMDs made after Dec. 31, 2022, by taxpayers who reach the age of 72 after that date (Title I, §106).

For tax years beginning after Dec. 31, 2023, the Sec. 219(b)(5) $1,000 individual retirement account (IRA) catch-up contribution amount for individuals age 50 and older is increased, based on a cost-of-living adjustment. Additionally, the Sec. 414(v) catch-up contribution amount is increased for participants age 62 through 64, in SIMPLE plans from $3,000 for 2021, adjusted for inflation, to $5,000 and from $6,500 (for 2021) to $10,000 for all other plans (Title I, §§107 and 108).

Qualified student loan payments are considered a matching contribution under Sec. 401(m)(4)(A) (Title I, §111).

Retirement plan incentives are enhanced for certain part-time workers. Clarification is provided on the definition of part-time workers and vesting requirements. Also, the period of service is reduced from three years to two years (Title I, §116).

Title II: Preservation of income

The proposed legislation amends the RMD rules for life annuities to permit certain additional kinds of payments (Title II, §201).

For qualifying longevity annuity contracts, the 25% premium limit is repealed. Joint and survivor benefits are enhanced. A “free-look” period allowing recension of the contract within 90 days is permitted (Title II, §202).

Title III: Simplification and clarification of retirement plan rules

The accidental overpayment of retirement plan benefits will not result in noncompliance with plan requirements, and fiduciaries may exercise their discretion not to seek recovery of the overpayment from participants and/or beneficiaries (Title III, §301).

A “retirement savings lost and found” online database managed by the U.S. Department of Labor will allow individuals to search plans and contact the administrator of any plan in which they are a participant or beneficiary (Title III, §306).

Several revenue provisions included within the bill would go into effect for tax years beginning after Dec. 31, 2022. The proposed legislation allows for an election to be made to treat Roth IRA contributions as SIMPLE IRA contributions and for simplified employee pension (SEP) plan contributions to be designated as Roth contributions. Clarification is provided on withdrawal rules for hardship under 403(b) plans. There is also an option to treat employer matching contributions as Roth IRA contributions.

RISE & SHINE Act

Once SECURE 2.0 passed the House, it was sent to the Senate for its review and revision process.

In response to SECURE 2.0, the Senate Health, Education, Labor, and Pensions Committee introduced its own version of the legislation on June 7, 2022, the RISE & SHINE Act.

The RISE & SHINE Act introduces several of its own provisions. Most notably, the included Emergency Savings Act of 2022 would allow participants and employers to contribute to a pension-linked savings account, limited to the lesser of $2,500 or a predetermined amount by the plan sponsor.

The RISE & SHINE Act does not include changes to the saver’s credit or the small business retirement plan credits, such as are included in SECURE 2.0. It also does not include modifications of the catch-up contribution amounts. The RISE & SHINE Act does require employers at least once every three years (but not more than once annually) to automatically re-enroll eligible employees who have previously opted out of the arrangement in a qualified automatic contribution arrangement, unless the employees elect to opt out again.

Several provisions within the proposed legislation would take effect for tax years beginning after Dec. 31, 2022. As such, they could affect tax planning for clients in the upcoming tax year. As of this writing, the Senate is in its review process, and the final legislation is likely to be different from the current drafts. Regardless of any law that eventually passes, tax preparers need to understand the many changes it could make to the retirement plan rules and relay those changes to their clients to allow them to maximize those benefits.

Editor Notes

Mark Heroux, J.D., is a tax principal in the Tax Advocacy and Controversy Services practice at Baker Tilly US, LLP in Chicago. Contributors are members of or associated with Baker Tilly US, LLP. For additional information about these items, contact Mr. Heroux at mark.heroux@bakertilly.com.