A bipartisan bill was recently introduced in the House to make significant changes to IRAs, 402(k), 403(b) and other retirement plans. The legislation aims to expand retirement savers’ options by increasing catch-up contributions and the required minimum distribution, expanding enrollment, and increasing savers credit for millions of Americans.
The bill called The Securing a Strong Retirement Act of 2020 is referred to as the Secure Act 2, as it follows the Secure Act passed into law last year. It was introduced by Richard Neal (D-Mass.), Ways and Means Committee Chairman and Ranking Member Kevin Brady (R-Texas).
Some of the key changes being proposed in the legislature include:
Increase in IRA Catch-Up Limit
The current catch-up limit allows individuals age 50 and above to save an extra $1,000 yearly to their IRA accounts. This amount has been the same for years because it has not indexed for inflation. Under the new law, the catch-up contribution limit will be indexed beginning from 2022.
Increase in 401(k) Catch-Up Limits
The 2020 401(k) catch-up allows employees aged 50 and above to contribute an extra $6,500 to their retirement plans. The catch-up limit is, however, $3,000 for SIMPLE plans. Under Secure Act 2, the catch-up limit for individuals aged 60 and above will increase to $10,000 ($5,000 for SIMPLE plans).
Increase RMD Age to 65
Retirement savers are required by law to make required minimum distribution withdrawals within the ages of 70.5 to 72. Secure Act 2 will increase the age for compulsory RMD withdrawals to 75. The legislature will also waive the RMD for individuals with less than $100,000 in their retirement plan on 31 December of the year before reaching 75.
Student Loans To Qualify For Matching Contributions
Many employers offer matching benefits for retirement saving plans based on the employee’s level of contribution. However, due to the cost of repaying their student loan, most young employees are unable to contribute to these retirement plans to leverage the matching advantage from their employer.
Secure Act 2 will change this by allowing employers to make matching contributions to employees repaying their student loans.
Expand Automatic Enrollment
Regulations that allowed employers to automatically enroll employees in workplace retirement plans with the option to opt-out have been found to boost employee participation, especially amongst Black, Latin, and lower-earning employees. One study found that the regulation has almost eliminated the racial gap in enrollment to retirement plans amongst employees.
Under Secure Act 2, employers would be required to automatically enroll eligible employees to 401(k), 403(b), and SIMPLE plans. The initial enrollment amount would be at least 3%, but not higher than 10%. The amount can be increased by one percent each year until it reaches the 10% limit.
Increase Saver’s Credit
Low and middle earning individuals can get up to $1,000 credit through the Savers Credit. If implemented, the Secure Act would increase this limit to $1,500 and increase the maximum income eligibility limit. It would also simplify the structures of the program by implementing a single 50% rate.
Other Changes To Retirement Savings
The Secure Act also proposes the following changes:
- Removes the barriers to having multiple employer plans. This allows small businesses to manage the cost of 403(b) plans.
- Allow employers to offer incentives to employees contributing to a retirement plan.
- Offer extra tax credit to employers who implement several things, like allowing spouses of military personnel to participate in their retirement plans within the first two months of hire.
- Ease the penalties associated with the correction of employee elective deferral failure.
- Eliminate some limitations that prevent the growth of qualified longevity annuity contracts (QLACs).
- Create an online registry that allows employees to locate retirement savings from employers that have moved, merged with other companies or changed their name.
