With the Securing a Strong Retirement Act of 2021 (aka, the SECURE Act 2.0) now off to the Senate for action, significant changes may be on the horizon for the retirement industry. To help financial professionals prepare, Retirement Director Ben Rizzuto outlines key provisions from the bill and how they could impact clients.

This week, the U.S. House of Representatives approved the Securing a Strong Retirement Act of 2021 (H.R. 2954), aka, the SECURE Act 2.0. This follows the unanimous approval of the bill by the House Ways and Means Committee in May 2021 and underlines the bill’s bipartisan support.

In the coming weeks, the bill will be sent to the Senate for action, where it may be changed or merged with other, similar, bills that have been introduced there, including the Retirement Security and Savings Act, S. 1770, and the Improving Access to Retirement Savings Act, S. 1703. So there remains a relatively high probability that SECURE 2.0 could be altered from its current form or that the Senate could pass its own measure, at which point both chambers would need to work to reconcile their separate versions.

While there are bound to be changes, just like its predecessor, 2019’s SECURE (Setting Every Community Up for Retirement Enhancement) Act, this bill not only has the potential to spur significant changes within the retirement industry, but also presents important planning opportunities for financial professionals and their clients.

Following are several key provisions from the bill in its current form to be aware of, as well as some considerations financial professionals should keep in mind.

Incentives for Small Business Owners

For those who work with small business owners, the bill would increase the small employer start-up credit to cover 100% of the cost to small employers of implementing a 401(k) plan for the first three years. Along with that, the bill would create an additional new credit to encourage small employers to make direct contributions for their employees, offsetting up to $1,000 of these employer contributions for each participating employee.

For small business owners who may have considered starting 401(k) plans in the past, these two provisions may provide the enticement they need to finally do so.

Retirement Plan Provisions

For those who work with plan sponsors that have existing retirement plans, the bill would introduce several changes.

First, it would require employers to automatically enroll eligible workers in new 401(k), 403(b) and SIMPLE plans at a rate of 3% of salary, which would increase annually until the employee is contributing 10% of their pay. The mandatory automatic enrollment would not apply to existing plans.

Employees could choose to opt out, and businesses with 10 or fewer employees or that have been operating for less than three years would be excluded from the required auto-enrollment.  For financial professionals, the provision creates opportunities to engage plan sponsors that are impacted in discussions about plan design and participant education.

Help for Young Workers

One provision that would be especially exciting for many plan participants if the bill is passed is one that would allow employers to match participants’ student loan repayments with their retirement account contributions.

Student loan debt currently sits at $1.7 trillion and the average borrower has $36,000 in debt.  This provision could help address what borrowers often view as an either/or proposition of saving for retirement or paying down debt.

Another potential change that could help young workers is the ability to elect that all or some of an employer match be applied to a Roth 401(k). This would provide tax benefits at retirement by allowing participants to diversify their tax situation and contribute more significant amounts to their tax-free bucket. This also provides for some great planning conversations as it could allow financial professionals to help clients better optimize retirement plan contributions based on their current and future tax scenarios.

A Provision for Part-Time Employees

Long-term, part-time employees were provided greater access to retirement plans via the SECURE Act. SECURE 2.0 would speed up this process by shortening the measurement period for eligibility, which started in 2021, from three years to two years. This would mean that long-term, part-time employees would become eligible to participate in retirement plans as early as January 1, 2023.

This provision would not only compress the timeline for plan sponsors, but it would also increase the importance of accurately tracking these employees and being able to administer their eligibility to the plan.

New RMD Age Proposed

The required minimum distribution (RMD) age currently stands at 72, meaning individuals need to take their first RMD by April 1 of the year following their 72nd birthday. The bill further increases the RMD age to 75. This change would be implemented over time, with the starting age increasing to 73 in 2022, to 74 in 2029 and finally to 75 by 2032.

A Boost for Catch-Up Contributions

Lastly, under another key provision of the bill, the $1,000 catch-up IRA contributions currently allowed for individuals age 50 and over would be indexed for inflation. Along with that, catch-up contributions into retirement plans, currently capped at $6,500 (except for SIMPLE plans, in which the maximum catch-up contribution is $3,000) would be increased to $10,000 for individuals age 62, 63 and 64, and then indexed for inflation. These changes would begin in tax years after December 31, 2023.

Other key changes in the proposed SECURE 2.0 bill include:

• The creation of an online Retirement Savings Lost & Found Database at the Department of Labor for workers and retirees to find “lost” retirement accounts.
• The expansion of self-correction opportunities, including for participant loan errors and employee elective deferral failures.
• A campaign designed to increase public awareness of the Saver’s Credit.
• A provision allowing 403(b) plans to sponsor or participate in an open 403(b) Multiple Employer Plan (MEP) or Pooled Employer Plan (PEP), and to offer Collective Investment Trusts (CITs) as investment options.

As with any piece of legislation, changes could very well occur as SECURE 2.0 works its way through the legislative process. At this point, however, it does seem like we may see significant retirement legislation in the future that could have important implications for individual investors and retirement plan sponsors alike. By familiarizing themselves with bill’s proposed provisions, financial professionals can be better prepared to help clients take advantage of the opportunities they present when the final bill is signed into law.