Secure Act 2.0: Securing a Strong Retirement Act (2021)

Whatever it is, the way you tell your story online can make aIn May, the House Ways and Means Committee unanimously approved the Securing a Strong Retirement Act of 2021 (SECURE Act 2.0). This proposed legislation is building on top of the original SECURE Act that went into effect in December 2019 with ideas that the Biden Administration has floated in the past. Unlike the typical gridlock that encompasses Washington D.C., the original SECURE Act enjoyed large bi-partisan support on all sides of the political spectrum. By all indications, the SECURE Act 2.0 is also going to enjoy broad support across political divides and should easily become the law by the end of the year. This bill’s passage would conclude two years of the most significant changes since 401(k) plans became the most common retirement vehicle in America.ll the difference.

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What was the original Secure act?

What has everyone excited about SECURE Act 2.0? The answer is that the original SECURE Act had several enhancements with the goal of making retirement plans accessible to more employees. Here are some of the high-level highlights of the original Secure Act:

1. Clarification on Multiple Employer Plans / Pooled Employer Plans to provide businesses of all sizes a cost-effective 401(k) offering to employees.
2. Increase the start-up 401(k) business tax credit from $500 to a maximum of $5,000 for 3 years. Additional tax credits for auto-enrollment 401(k) plans. 
3. Allow an existing 401(k) plan to adopt a Safe Harbor provision in the middle of a tax year.
4. Allow lifetime income options in the form of QLAC (Qualified Longevity Annuity Contract) annuities as an investment option in a 401(k) Plan. 
5. A requirement that all 401(k) platforms must provide plan participants an annual benefits statement that includes lifetime income projections.
6. Allow businesses to implement a profit-sharing plan and fund it until corporate tax filings are completed. 

Mandatory Automatic Enrollment

The data has proven that automatic enrollment increases participation in 401(k) plans. The biggest proposal that has come out of SECURE Act 2.0 would be the requirement for all new 401(k) plans to implement an automatic enrollment provision. The current proposal would require the automatic contribution rate to be set at a minimum 3% with a 1% increase each year to a cap of at least 10%. An employer could choose a higher initial automatic contribution rate. Participants would have 90 days to request a withdrawal of their automatic contributions with no penalty.

Existing 401(k) plans would not be required to enact the automatic contribution provision. More than a third (36.9%) of all retirement plans in the U.S. have adopted an auto-enrollment plan. That number has been steadily increasing every year since auto-enrollment plans were permitted in 1998.

Catch-Up Contribution Limits

Currently, 401(k) participants that are over the age of 50 can make an additional catch-up contribution up to $6,500 annually on top of the current 401(k) deferral limit of $19,500. The proposal within SECURE Act 2.0 is to increase the catch-up contribution for participants between age 62 and 65 to $10,000 annually, which will increase over time based on cost-of-living indexes

Furthermore, another proposed change would be to require all catch-up contributions to be designated Roth contributions. The thought process behind this proposed change is that Uncle Sam would like to collect their tax dollars immediately.

Roth Matching Contributions

Currently, 401(k) plan participants typically have the option to contribute either traditional pre-tax or after-tax Roth. However, all employer contributions made to a qualified retirement plan are considered pre-tax and participants would have to claim as income when they withdrawal their 401(k) account in retirement. The good news with SECURE Act 2.0. is that participants would have the option to elect for employer contributions to be designated as Roth or remain pre-tax. It remains to be seen if the employee or employer would be responsible for paying the immediate taxes to convert to Roth.

Part-Time Workers Participation

Historically, part-time employees are unable to participate in most 401(k) plans due to restrictive plan design features such as making employees to work 1 year and 1000 hours to be eligible. The SECURE Act 2.0 will make the barrier to enter a 401(k) plan easier as employees who work 500 hours or more per year for two years would be eligible to participate. This new change should help young people who may be working part-time while going to college start building their nest egg for retirement.

Plan Sponsor Tax Credits

The original SECURE Act boosted the business tax credit to implement a brand new 401(k) plan from a flat $500 for 3 years to a tax credit of 50% of administrative costs to a maximum of $5,000 for 3 years. SECURE Act 2.0 is going to further sweeten the pot by allowing small employers (up to 50 employees) to take a tax credit of 100% of administrative costs for 3 years by starting a 401(k) plan. Furthermore, there would be a new tax credit that encourages small businesses to make employer contributions to participant’s accounts by offsetting up to $1,000 of those contributions for each eligible employee. These full tax credits will apply to companies that have less than 50 employees.

Student Loan Matching

Student loan debt has been a hot-button issue, receiving increased publicity during the early days of the Biden Administration. As politicians discuss the best solution, the reality is that in 2020, the average student loan debt topped $37,500 per borrower which collectively adds up to $1.6 Trillion. The effect is that many recent graduates are unable to start saving for retirement while paying their debt off. An interesting proposal as part of the SECURE Act 2.0 is that when employees make payments to their student loans, employers can treat those payments as a deferral to the 401(k) plan and therefore the participant would be able to earn the matching contribution. The matching contributions for student loan payments must be at the same rate as traditional elective deferrals and would also be subject to the same vesting schedule. This should help young employees starting the career to get a head start on their retirement nest egg.

Student Loans in 2020

$1.57 trillion	Amount of student loan debt outstanding in the United States
54%	Percentage of college attendees taking on debt, including student loans, to pay for their education
$37,584	The average amount of student loan debt per borrower
14%	Percentage of adults carrying student loan debt
6.5%	Amount of student debt that’s at least 90 days past due or in default

Sources: Experian, Federal Reserve, EducationData.org

Growth of Student Loan Debt (in Trillions)

2020	$1.57
2019	$1.41
2018	$1.33
2017	$1.28
2016	$1.17
2015	$1.13
2014	$1.06

Sources: Experian

Planning for Change at LT Trust

Much like the original SECURE Act, there is a lot to digest. Also like the original, all of these changes have the common goal to increase awareness for retirement savings while making 401(k)’s more accessible to everyone. While this piece of legislation still needs full votes in the House of Representative and Senate, you can count on this becoming law. Retirement awareness has become something of a unicorn, that almost everyone in Washington agrees with. Some of these provisions, such as the new tax credits are scheduled to take effect in 2022.

With all the recent and proposed changes, LT Trust remains committed to providing the best 401(k) experience for our partners and plan sponsors. We will continue to enhance our offering and remain diligent to implement these exciting legislation changes to ensure everyone has the opportunity to a dignified retirement plan. If you have any questions regarding the changing legislation scene or learn more about our 401(k) experience, you can schedule an appointment with one of our Retirement Sales Consultants, or call us at (833) 458-4015. Happy Savings!!!!