SECURE 2.0: A Bipartisan Effort To Help Retirement Savers

By: Andy Blocker and Jennifer Flitton

Key takeaways

Promoting plan participation

Building on the bipartisan SECURE Act of 2019, SECURE 2.0 includes 92 provisions intended to increase participation in retirement plans.

A phased approach

Most changes under the legislation do not take effect until 2024 or 2025, but some provisions will impact retirement plans in 2023.

What’s the next step?

With the retirements of two key Republican champions, the potential for a SECURE 3.0 will be somewhat dependent on who fills these voids.

In December 2022, Congress passed an Omnibus appropriations bill for the remainder of Fiscal Year (FY) 2023, and President Joe Biden signed it into law. The Omnibus included the bipartisan SECURE 2.0 Act¹ of 2022, which aims to bolster Americans’ retirement savings.

Building on the bipartisan SECURE Act of 2019, SECURE 2.0 is the product of four bipartisan legislative proposals coming out of the tax and labor committees of the House and Senate. Together, the 2019 and 2022 acts are widely seen as the most significant reform to retirement policy in over a decade, impacting virtually all types of retirement plans.

Impact to retirement plans

Industry and policy leaders believe the impact of the legislation will help address the widening retirement coverage and access gap in an effort to avoid undermining future government-sponsored safety nets, such as Social Security solvency.

At a high level, SECURE 2.0 contains a number of broadly applicable changes for employers and plan sponsors. Generally, the majority of changes under the legislation do not take effect until 2024 or 2025, but some provisions will impact plans in 2023.

• Requires automatic plan enrollment for eligible employees (2025)
• Makes it easier for part-time employees to participate in 401(k) plans (2025)
• Allows for a new employer match for student loan payments (2024)
• Creates new starter 401(k) plans for employers without retirement plans (2024)
• Increases “catch-up” contributions limit for ages 60, 61, 62, and 63, as well as increases the required minimum distribution age to 75 for future retirees (2025)

Major provisions of the act

SECURE 2.0 includes 92 provisions intended to increase participation in retirement plans by expanding automatic enrollment features, decrease costs for employers that seek to offer retirement plans for their employees, encourage small businesses to offer retirement plans, and simplify various rules relating to 401(k), 403(b), and other retirement plans. The act also encourages workers to save more and allows retirees to save longer. Finally, the act provides flexibility for workers who have unexpected emergency expenses. Key provisions (and their effective dates) include:

• Automatic enrollment (2025). Section 101 requires certain newly established 401(k) and 403(b) plans to automatically enroll participants when they become eligible (although employees may opt out at any point). 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%.
• Small business startup credit (2023). Section 102 increases the startup credit from 50% to 100% for employers with up to 50 employees.
• Saver’s match (2027). Section 103 repeals and replaces the Saver’s Credit with respect to Individual Retirement Account (IRA) and retirement plan contributions, changing it from a credit paid in cash as part of a tax refund into a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan.
• Pooled employer plans (2023). Section 105 clarifies that a pooled employer plan (PEP) may designate a named fiduciary (other than an employer in the plan) to collect contributions to the plan.
• Mandatory distribution age (in phases). The bill increases the required minimum distribution (RMD) age from 72 to 75 through a phased-in implementation – 73 for a person who attains age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2033, and then 75 for an individual who attains age 74 after Dec. 31, 2032.
• IRA catch-up limits (in phases).Under current law, the limit on IRA contributions is increased by $1,000 (not indexed) for individuals who have attained age 50. Section 108 indexes the IRA catch-up limit and is effective for taxable years beginning after Dec. 31, 2023. It also increases the catch-up limits to the greater of $10,000 or 50% more than the regular catch-up amount in 2025 for individuals who have attained ages 60, 61, 62, and 63. The increased amounts are indexed for inflation after 2025.
• Roth treatment for Roth catch-up contributions (2024). Catch-up contributions must be treated as Roth contributions for employees with compensation of more than $145,000 (indexed).
• Rothification of catch-up contributions (2024). The bill requires all catch-up contributions to be made on a Roth basis. All 401(k), 403(b) and governmental 457(b) plans will need to have a Roth feature by 2024 or not offer catch-up contributions to their participants. The bill provides that employees with wages in the preceding year of less than $145,000 (indexed) are not subject to the mandate. 
• Treatment of student loan payments as elective deferrals for the purposes of matching contributions (2024). Section 110 permits an employer to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to “qualified student loan payments.” Employees must certify annually that they have made the loan payment.
• Emergency withdrawals (2024). Section 115 provides for an exception from the 10% tax on early distributions for certain distributions used for emergency expenses, which are unforeseeable or immediate financial needs relating to personal or family emergency expenses. Only one distribution is permissible per year of up to $1,000, and a taxpayer has the option to repay the distribution within three years.
• Contribution limit for SIMPLE plans (2024). Under current law, the annual contribution limit for employee elective deferral contributions to a SIMPLE IRA plan is $14,000 (2022) and the catch-up contribution limit beginning at age 50 is $3,000. Section 117 increases the annual deferral limit and the catch-up contribution at age 50 by 10%, as compared to the limit that would otherwise apply in the first year this change is effective, in the case of an employer with no more than 25 employees. An employer with 26 to 100 employees would be permitted to provide higher deferral limits, but only if the employer either provides a 4% matching contribution or a 3% employer contribution.
• Starter 401(k) plans (2024). Section 121 permits an employer that does not sponsor a retirement plan to offer a starter 401(k) plan (or safe harbor 403(b) plan).
• Part-time workers (2025). As established in the 2019 SECURE Act, employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee must complete either one year of service (with the 1,000-hour rule) or three consecutive years of service (where the employee completes at least 500 hours of service). Section 125 reduces the three-year rule to two years.
• Enhancement of 403(b) plans (2023). Section 128 would permit 403(b) custodial accounts to participate in group trusts with other tax-preferred savings plans and IRAs, immediately effective after date of enactment.
• Life annuities (2022). Section 201 eliminates certain barriers to the availability of life annuities in qualified plans and IRAs that arise under current law due to an actuarial test in the required minimum distribution regulations.
• Insurance-dedicated ETFs (requires Treasury modification of regulation). Section 203 directs the Treasury Department to provide that ownership of an exchange-traded fund’s shares by certain types of institutions that are necessary to the ETF’s structure would not preclude look-through treatment for the ETF, as long as it otherwise satisfies the current-law requirements for look-through treatment. This essentially would facilitate the creation of a new type of ETF that is “insurance-dedicated.”
• Treasury guidance on rollovers (requires Treasury modification of regulation not later than January 1, 2025). Section 324 requires the Treasury secretary to simplify and standardize the rollover process by issuing sample forms for direct rollovers that may be used by both the incoming and outgoing retirement plan or IRA. Development and release of the sample forms must be completed no later than Jan. 1, 2025.
• Rollover of excess 529 assets to a Roth IRA (2024). Certain assets in a 529 qualified tuition program will be allowed to be directly rolled over tax-free to a Roth IRA mainly for the benefit of the beneficiary of the 529 account. Such rollovers would only be permitted from 529 accounts that have been maintained for at least 15 years. The rollovers from 529 accounts would be subject to a lifetime limit of $35,000.

Could we get a SECURE 3.0?

Retirement continues to be a bipartisan issue. SECURE 2.0 was enacted three years after the 2019 SECURE Act, with unanimous votes out of each committee of jurisdiction. However, with the retirements of two key Republican champions, Sen. Rob Portman (R-Ohio) and Ranking Member Kevin Brady (R-Texas), Democrats in both chambers will need to find new dance partners for these issues. Priorities for a potential SECURE 3.0 will be somewhat dependent on who will fill these voids.

Even before the passage of SECURE 2.0, staff of the relevant House and Senate committees had begun work on a SECURE 3.0 bill that could be considered in the 118^th Congress, although prospects for a bill as comprehensive as SECURE 2.0 may be complicated, as indicated above.

One potential area of focus is allowing 403(b) plan participants to access collective investment trusts (CITs). Under SECURE 2.0, the tax code was amended to allow 403(b) plans to invest in group trusts (which include CITs). However, it did not include securities law exemptions to effectuate the provision. It is expected that Congress will look to include such language in the context of future retirement reform legislation.

In addition to some technical changes that need to be made, staggered implementation of SECURE 2.0 could cause policymakers to pause on another comprehensive retirement measure until they can more fully assess individual and industry feedback on what’s been done so far.

Footnotes

• 1The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act

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Originally Posted February 3, 2023

SECURE 2.0: A bipartisan effort to help retirement savers by Invesco US

Important information

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This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation. The opinions in this piece are not necessarily those of Invesco. Information in this report does not pertain to any Invesco product and is not a solicitation for any product.

Inflation indexing refers to automatic cost-of-living adjustments made to keep pace with inflation.

The opinions referenced above are those of the author as of Jan. 30, 2023. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.