Secure 2.0

Kimberly A. Reed
Principal, CPA

2 November 2021

There are a number of potential changes on the horizon that could impact your retirement plan. These changes will help your employees save more for retirement at every stage of their career. These changes may be coming from the SECURE Act 2.0. Some of the proposed legislation is as follows:

SECURE Act 2.0 would require employers that establish a plan after 2021 to include an automatic contribution arrangement that allows employees to make permissive withdrawals, and that meets requirements relating to the minimum contribution percentage and the investment of the employee’s contributions. The proposed legislation would begin at a rate of 3% and would increase 1% per year, up to 10%.

The proposal provides that contributions to a section 403(b) plan that are held in a custodial account are treated as contributions to an annuity contract if the assets are to be held in that custodial account and invested in regulated investment company stock or a group trust intended to satisfy the requirements of IRS Revenue Ruling 81-100. In other words, the proposal does not restrict a section 403(b)(7) custodial account to being invested solely in regulated investment company stock.

The proposal changes the age on which the required beginning date for required minimum distributions is based, from the calendar year in which the employee or IRA owner attains age 72 to the calendar year in which the employee or IRA owner attains age 73, for individuals who attain age 72 after December 31, 2021, and who attain age 73 before January 1, 2029. In addition, the proposal changes such age from 73 years to 74 years, for individuals who attain age 73 after December 31, 2028, and who attain age 74 before January 1, 2032. Such age is further increased to age 75 for individuals who attain age 74 after December 31, 2031.

Under the proposal, the $1,000 amount that may be contributed as a catch-up contribution by individuals who attain age 50 by the end of the taxable year is increased for cost-of-living adjustments for taxable years beginning in 2023 or later.

Under the proposal, the limit on catch-up contributions is increased for individuals who have attained age 62, 63, or 64 (but who are not older than 64) by the end of the taxable year. A section 401(k) plan (other than a SIMPLE section 401(k) plan), section 403(b) plan, or governmental section 457(b) plan may increase the limit on catch-up contributions for such individuals to the lesser of (1) $10,000 or (2) the participant’s compensation for the year reduced by any other elective deferrals of the participant for the year. A SIMPLE section 401(k) plan or a SIMPLE IRA may increase the limit on catch-up contributions for such individuals to the lesser of (1) $5,000 or (2) the participant’s compensation for the year reduced by any other elective deferrals of the participant for the year. Both the $10,000 amount and the $5,000 amount are indexed for inflation beginning in 2023.

The proposal modifies the definition of matching contribution for purposes of defined contribution plans, including section 401(k) plans, to include employer contributions made to the plan on behalf of an employee on account of a qualified student loan payment. For this purpose, a qualified student loan payment is a payment made by an employee in repayment of a qualified education loan and incurred by the employee to pay qualified higher education expenses, but only to the extent such payments in the aggregate for the year do not exceed the amount of elective deferrals that the employee would be permitted to contribute under the Code (reduced by elective deferrals made by the employee for the year). Qualified higher education expenses are defined as the cost of attendance at an eligible educational institution. In addition, in order for the student loan payment to qualify, the employee must certify to the employer making the matching contribution that the loan payment has been made. The employer is permitted to rely on this certification.

Under the proposal, a plan will not fail to be treated as a qualified plan, a section 403(b) tax sheltered annuity, an IRA, or a section 457(b) plan solely by reason of a “corrected error.” For purposes of this proposal, a “corrected error” means a reasonable administrative error in implementing an automatic enrollment or automatic escalation feature in accordance with the terms of an eligible automatic contribution arrangement, provided that such implementation error:

Is corrected by the date that is nine and one-half months after the end of the plan year during which the failure occurred;

Is corrected in a manner that is favorable to the participant; and

Is of a type which is so corrected for all similarly situated participants in a nondiscriminatory manner.

The correction may occur before or after the participant has terminated employment and may occur without regard to whether the error is identified by the Secretary. The Secretary must issue regulations or other guidance of general applicability specifying the methods that are “in a manner favorable to the participant or beneficiary.”

The proposal modifies the rules that apply to long-time part-time employees under a section 401(k) plan to reduce the service requirement for such employees from three years to two years. Thus, under the proposal, a section 401(k) plan generally must permit an employee to make elective deferrals if the employee has worked at least 500 hours per year with the employer for at least two consecutive years and has met the minimum age requirement (age 21) by the end of the two-consecutive-year period. In addition, the proposal clarifies the effective date of the long-term part-time employee rules. Under the proposal, 12-month periods beginning before January 1, 2021 are also not taken into account in determining a year of service for purposes of the rules applicable to the vesting of employer contributions.

This Act contains many opportunities for your employees to save for their futures. Be on the lookout for final passage of this Act.

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