Top SECURE Act 2.0 benefits for plan sponsors and participants

Earlier this month, the House Ways and Means Committee unanimously approved the Securing a Strong Retirement Act of 2021. Nicknamed “SECURE Act 2.0,” the legislation builds on the tax credits and other retirement benefits that went into effect in December 2019 when the SECURE Act was passed. The bill, in its current form, includes many benefits for plan sponsors and participants.

Plan sponsor benefits

Tax credits.  Starting in 2022, SECURE Act 2.0 increases the small employer (up to 50 employees) pension plan start-up credit to cover 100% of administrative costs for the first three years of 401(k) plan implementation.

It also creates a new credit to encourage small employers to make direct employee contributions, offsetting up to $1,000 of these contributions for each participating employee. This full credit applies to companies with 50 employees or less.

Companies with 51 to 100 employees can also take advantage of this credit, but it would be phased out over time. These businesses would receive the full tax credit in the first and second years, 75% of the credit in the third year, 50% credit in the fourth, and 25% credit in year five. There are no tax credits after the fifth year. These tax credits are significant, as they truly help make retirement plans more financially accessible in the small plan market. 

Auto-enrollment. Starting in 2025, 401(k), 403(b), and SIMPLE plans must automatically enroll participants upon eligibility. That said, employees always have the ability to opt out of participating.

These plans would be required to automatically enroll participants at a minimum of a 3% contribution rate or higher, and the rate must be increased by 1% each year (to at least 10%, but no more than 15%). Small businesses with fewer than 10 employees, new businesses less than three years old, and churches and governments are exempt.

MEPs + 403(b)s. The bill expands the scope of the SECURE Act’s pooled employer plan (PEPs) or open multiple employer plan (MEPs) provisions to allow unrelated public education and other non-profit employers to join a single 403(b) plan.

CITs + 403(b)s. 403(b) plans can now invest in collective investment trusts (CITs), which is currently prohibited by the tax code. A CIT is an investment vehicle similar to a mutual fund but available only to qualified retirement plans. 

Easing administrative burdens – The bill also expands opportunities for plans to self-correct certain operational errors and will ease some compliance testing requirements. Additionally, it gives employers more time to adopt certain plan amendments up until the due date of their tax return, as opposed to the end of the plan year.

This gives employers with existing plans the flexibility to evaluate their ability to make their 401(k) plans more generous to employees after the end of the year. 

Participant perks

Part-time employees. The bill allows part-time workers to make employee contributions to an employer’s defined contribution retirement plan earlier than the original Act. To be eligible, the SECURE Act 2.0 requires these employees work 500 or more hours per year for two years instead of the previous three years. 

Required Minimum Distributions (RMDs). Given that more Americans are delaying retirement, the age at which RMDs begin will increase with a phased approach that will eventually apply to participants at age 75.

The bill also allows a participant to fulfill RMD requirements by purchasing a fixed annuity with specific features, including providing a death benefit equal to the amounts paid for the annuity minus prior payments.

Enhanced catch-up contributions. In addition to the ordinary catch-up provision for participants aged 50 and up, the bill allows additional contributions up to $10,000 for those who are between the ages of 62-64 for 401(k) and 403(b) plans and up to $5,000 for SIMPLE plans.

Family attribution rule changes. SECURE Act 2.0 helps to modernize the family attribution rules, which  are often considered to be outdated and unfair. These rules are used to analyze whether plans are part of controlled groups to prevent women business owners from being penalized if they have minor children or live in a community property state.

Under existing law, spouses in the nine community property states are automatically considered to own half of all property obtained during the marriage. As a result, business owners must bundle their business with their spouse when performing retirement plan coverage and nondiscrimination tests, which can be problematic, especially if there is a separation or family conflict.

The bill remedies this by removing attribution for spouses with separate and unrelated businesses who reside in community property states and between parents with separate and unrelated businesses who have minor children.

Student loan payments. Last but not least, the Act includes a provision to create a retirement plan matching program designed to help employees pay off student loans. Employers would be allowed to match employee student loan payments with a contribution to the employee’s retirement plan.

Those participants would also be allowed to receive a matching contribution for student loan repayments, which would be given special treatment for compliance testing purposes. 

While these are just the highlights, there are some additional benefits of the Act. Please keep in mind that these provisions are subject to change as the legislation moves through the legislative process, so keep the dialogue open with your accountant, recordkeeper, and financial advisor. Regardless, these changes should hopefully mean more employers offering company-sponsored retirement plans and increased retirement preparedness for participants. 

Allison Brecher, General Counsel with Vestwell, has over 20 years of legal and regulatory experience, handling high profile and complex litigation involving employee benefits, ERISA, regulatory matters, data privacy and electronic discovery. For more information, please visit www.vestwell.com.