The devil, as they say, is in the details, and that means advisors and plan sponsors seeking to maximize the benefits from the recently enacted SECURE Act 2.0 better start digging deep into the law’s numerous, minutiae-filled provisions.
The comprehensive retirement savings legislation signed into effect by President Biden last week as part of a $1.65 trillion government funding bill includes 92 provisions designed to increase the number of Americans saving for retirement, as well as the size of their nest eggs.
Among its many provisions, SECURE Act 2.0 mandates auto-enrollment for new plans, increases catch-up contributions for certain workers, allows for matching contributions to be applied for qualified student loan payments, increases the age for required minimum distributions and permits the establishment of emergency savings accounts linked to individual retirement plans.
“Many of these provisions should help participants save more for retirement," said Mike Moran, senior pension strategist at Goldman Sachs Asset Management. "They also acknowledge that retirement saving intersects with other financial priorities that individuals face throughout their working years, such as student loan repayments and emergency expenses.”
Section 121 of the Act, for example, permits an employer that doesn't sponsor a retirement plan to offer a starter 401(k) plan or a safe harbor 403(b) plan. Either one of the two options would generally require that all employees be default-enrolled in the plan at “a 3 to 15 percent of compensation deferral rate.”
The provision goes on to say that the limit on annual deferrals would be the same as the IRA contribution limit, which for 2022 is $6,000 with an additional $1,000 in catch-up contributions beginning at age 50. Section 121 is effective for plan years beginning after Dec. 31, 2023.
Joe DeBello, managing consultant at strategic advisory shop OneDigital, believes the tax benefits associated with the new law will undoubtedly encourage business owners currently not offering retirement plans to start rolling them out.
“The Starter (k) provisions provide an easy-button option for employers to easily take advantage of newly enacted tax credits and avoid the hassle of complicated administration associated with legacy plan designs,” DeBello said, adding that the American Retirement Association estimates that the Starter (k) alone will provide retirement plan access for 19 million more Americans.
Coleman Benko of Benko Financial Services calls the tax credits for start-up qualified plans with auto-enrollment of employees a “game changer.”
“I believe many of my small business clients now have the incentive to put a retirement plan in place that will benefit the employees tremendously," Benko said. "This type of credit offsets the out-of-pocket expense to employers that is often a barrier to entry.”
At the very top of the list of provisions, the SECURE Act 2.0’s authors spell out their intent to expand coverage through automatic enrollment, citing studies showing how a mandatory opt-in program significantly increases retirement plan participation. Section 101 requires 401(k) and 403(b) plans to automatically enroll participants in the plans once they become eligible, while enabling employees to opt out of coverage.
"We know that individuals who save early in their careers have an advantage over those who start saving later," said David Scranton, CEO and founder of Sound Income Group. "The Secure Act 2.0 will help build retirement portfolios by allowing more workers to participate and allowing employers to auto-enroll employees into programs."
Put simply: “If they get enrolled, they will stay enrolled,” said Tim Slavin, senior vice president of retirement at Broadridge Financial Solutions.
As for the details, Section 101 states that the initial automatic enrollment amount is at least 3% but not more than 10%. Each year thereafter, that amount is increased by 1% until it reaches at least 10%, but not more than 15%. Furthermore, all current 401(k) and 403(b) plans are grandfathered in. However, there's an exception for small businesses with 10 or fewer employees, businesses that are less than three years old, church plans and governmental plans.
It's also worth noting that businesses will not have to turn on a dime to meet these new provisions. For example, the automatic enrollment feature won't take effect until Dec. 31, 2024, giving plan sponsors plenty of time to adjust accordingly.
“Plan sponsors should be aware of the new rules, which may be confusing, so getting a head start is prudent,” said Michelle Riiska, a financial planning analyst at eMoney Advisor.
Leslie Beck, a financial planner at Compass Wealth Management, said SECURE 2.0 should be referred to as the “Roth IRA Act 2.0” since so many of its provisions impact both Roth IRAs and designated Roth Accounts.
“Some of these new provisions are good, like being able to roll over 'leftover' 529 plan money into a Roth IRA,” Beck said. “Yet some of them are not so great. For instance, people 50 and older with incomes over $145,000 are no longer able to make catch-up contributions into a traditional 401k. Instead, all catch-up contributions in defined-contribution plans can only be made to a Roth 401k come 2024.”
Another impactful change that addresses Roth accounts is the ability for employees to receive matching contributions from their employers, with the company contributing their match on a Roth basis. Before the act, matching was only possible on a pretax basis.
eMoney’s Riiska also points out that starting in 2024, required minimum distributions will be eliminated for Roth 401(k)s and allow them to be treated like Roth IRAs without requiring a rollover.
“SEP and SIMPLE IRAs will also be able to offer Roth tax treatment for contributions starting in 2023, which allows additional flexibility for employees working for smaller companies to make the choice that makes sense for them best regarding pretax or post-tax contributions,” Riiska said.
Kelly Famiglietta, partner at Charles Stephen, notes that SECURE 2.0 also makes some changes to allowable distributions from retirement plans for things like domestic violence and other emergency savings withdrawals, as well as increasing savings opportunities for those close to retirement or who may wish to have their employer contributions contributed by their employer "Roth" style.
“While we are still digesting all of the changes and waiting for some guidance from the IRS on implementation, there are many exciting changes that will help many achieve a more secure retirement," Famiglietta said.
Another provision that may require planning by plan sponsors is the one allowing student loan payments to be eligible for a company match, even if the employee doesn't contribute to the plan directly. This provision, set to start in 2024, is meant to offset the situation of people new to the workforce who forgo retirement savings in order to pay down their student loans, thereby leaving the so-called “free money” of the match on the table.
The new student loan rules permit an employer to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to “qualified student loan payments.” The Act defines a qualified student loan payment as “any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.”
"We believe the incentives and plan design requirements for new plans are fantastic, and the inclusion of provisions for emergency savings/distributions and matching on student loan payments will go a long way to benefit employees,” said Jon Upham, principal at SageView Advisory Group.
The fact that qualified student loan payments will now be eligible for an employer’s matching contributions in retirement plans is another “game changer,” said Tamara Telesko, director of wealth planning strategies at TIAA.
“Those matching contributions are often 3% to 5% of your salary," Telesko said. "So let’s say you make $55,000 a year and use 3% of that to repay student loans. That’s $1,650 for the loans, and another $1,650 from your employers toward retirement savings.”
Jay Charles, director of annuity products at Luma Financial Technologies, is focused on Title II of the Act, primarily Sections 201 and 202. which deal with annuity contracts. Section 201, for instance, eliminates certain barriers to the availability of life annuities in qualified plans and IRAs that arise under current law as the result of an actuarial test in the required minimum distribution regulations.
“The RMD rule changes that expand the range of annuity products that meet RMD requirements within qualified accounts will give individuals more options to choose from to meet their individual retirement goals,” he said.
Charles is also a fan of Section 202’s increase, from $125,000 to $200,000, in the cap on the amount of retirement savings an individual can use to purchase a qualified longevity annuity contracts, which he says will help individuals ensure they have great guaranteed income late in their retirement when many need it most.
Finally, he applauds the reduced barriers that allow for the expansion of the use of ETFs in variable annuities.
“This will provide individuals additional low-cost investment options as well as potentially expand the appeal of VAs for RIAs who use ETFs with clients today,” Charles said.
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