It’s increasingly likely that new legislation on retirement plans will emerge from Congress sometime in 2022. Whether this is “SECURE Act 2.0″ — a revised version of 2019’s “Setting Every Community Up For Retirement Act” that’s been passed by Congress— or a different version that is making its way through the Senate, employers should be prepared.
Potential Changes to Watch
The details will undoubtedly be tweaked during the reconciliation process, but many of the provisions in the House bill appear to have broad Senate support as well and are considered likely to appear in the final version. Here are some of the more significant features of SECURE Act 2.0 that employers should be watching:
Mandatory Automatic Enrollment: One of the main provisions is a requirement that employers who establish new 401(k) or 403(b) defined contribution plans must automatically enroll workers when they become eligible, rather than having employees opt in. The initial employee contribution rate would be at least 3 percent of the employee’s compensation, increasing annually until it reaches 10 percent. Employees would still have the option to opt out of automatic enrollment. Businesses with existing plans, those with 10 or fewer employees, and companies that are less than three years old would be exempt from this requirement.
Small Business Tax Credits: SECURE Act 2.0 would offer increased tax credits for small businesses that start a retirement plan. Beginning in 2023, the current three-year small-business retirement plan startup credit of 50 percent of administrative costs would increase to 100 percent for employers with 50 or fewer employees, with an annual maximum credit of $5,000. The bill also provides an additional tax credit for a portion of the employer’s contributions, up to a maximum credit of $1,000 per employee.
Roth Contributions: Under current law, employers contribute on a pretax basis, so employees are taxed when they receive distributions from the plan. SECURE Act 2.0 would let employees elect to treat all or part of employer contributions as Roth contributions, resulting in tax-free growth but current taxation.
Delayed Required Minimum Distributions. The original SECURE Act increased the age at which plan participants must start taking mandatory distributions to age 72. SECURE Act 2.0 would increase that further to age 73 in 2023, 74 in 2030, and 75 in 2033. It would also significantly reduce the penalty for failing to take a required distribution.
Expanded Catch-up Contributions: After 2023, employees ages 62 through 64 could make additional catch-up contributions of up to $10,000 annually to their 401(k) plans, or up to $5,000 to SIMPLE 401(k) or SIMPLE IRA plans. Those amounts would be indexed for inflation. The existing $6,500 catch-up contributions for employees ages 50 or older would also be indexed for inflation. In addition, the proposed law would require all catch-up contributions made to qualified retirement plans after Jan. 1, 2022, to be treated as Roth contributions subject to current taxation.
Owner Exit Planning: Currently, only the gain from the sale of C corporation shares to an Employee Stock Purchase Plan can be deferred. SECURE Act 2.0 would allow 10 percent of the gain from the sale of S corporation stock to be eligible for a similar gain deferral.
Other Plan Changes: SECURE Act 2.0 would enhance participation of long-term part-time workers by shortening the eligibility period from three years to two years. Other provisions would allow employers to match employees’ student loan payments as retirement contributions and eliminate certain barriers to offering lifetime income annuities as a retirement plan investment option.
A retirement plan is a great way to attract and retain talent and offers tax advantages as well. But you should always be aware of new legislation and tax code changes that can impact plans and company finances.
Dembo Jones’ audit and accounting team includes professionals focused on employee benefit plans. We can help you choose the plan that makes the most sense for your business, certify compliance, protect its assets, design internal controls, and ensure a complete and accurate Form 5500. Contact us today.