On May 5, the House Roads and Means Committee unanimously passed the Act to ensure a strong retirement in 2021. The bill is expected to be voted on later this summer by the full House, where it is already receiving strong support.
The new bill, called the SECURE Act 2.0, is part of the 2019 SECURE (Setting Every Community Up for Retirement Enhancement) Act, which expanded retirement coverage to more Americans. In addition, the new bill includes several provisions designed to facilitate the administration of the retirement plan that should encourage more employers to adopt 401 (k) plans.
Key provisions of the SECURE Act 2.0 related to 401 (k) plans include:
- Extension of automatic registration. Requires new 401 (k) plans to automatically enroll employees at a default rate of 3% to 10% and automatically increase contributions to 1% per year to a minimum of 10% (but not more than 15%) . Of course, employees can always change the contribution rate or unsubscribe from the plan at any time. Existing plans are invalid and new companies, as well as those with 10 or fewer employees, are exempt.
- Improved tax credits for small business plans. The SECURE law provides companies with less than 100 employees a three-year tax credit of up to 50% of plan start-up costs. The new bill increases credit to 100% of costs for employers of up to 50 employees. In addition, SECURE Act 2.0 offers a new tax credit to employers of 50 or fewer employees, encouraging direct contributions to employees. This new tax credit would reach $ 1,000 per participating employee.
- Raising the age for mandatory minimum distributions (RMD) to 75. The SECURE law raised the age of RMD to 72 years (from 70.5). The new bill further raises the age of the RMD: to 73 in 2022; 74 in 2029 and finally 75 in 2032.
- Higher recovery limits. Recovery contributions make older Americans more able to contribute to their retirement accounts. Under current legislation, participants 50 years of age or older can contribute an additional $ 6,500 to their 401 (k) plans in 2021. The new bill raises these limits to $ 10,000 for 401 (k) participants at 62, 63, and 64 years.
- Ability to agree on student loans. Heavy student debt burdens prevent many employees from saving for retirement, often preventing them from making valuable matching contributions. Under this provision of the bill, student loan repayments could be accounted for as elective deferrals and be eligible for 401 (k) of your employer’s contributions. The bill would also allow for a plan to test these employees separately for compliance purposes.
- One-year reduction in service period requirements for long-term part-time workers. The SECURE Act of 2019 requires employers to allow long-term part-time workers to participate in the 401 (k) plan if they work 500 to 999 consecutive hours for 3 years. The new bill reduces the requirement to two years. Please note that plans with the normal 1000-hour, 12-month eligibility requirement for part-time employees must allow participants who meet this requirement to enter the plan.
- Retroactive elective postponements of the first year for private owners. Thanks to the SECURE law, employers can retroactively establish a profit-sharing plan for the previous year up to the corporate tax deadline. This allows the owner to receive profit shares from the previous year without having to make any deferral of employees. SECURE Act 2.0 extends the retroactive rule to sole proprietors or single-member LLCs, where only one owner is used. For example, a sole proprietor would have until April 15, 2022 to allocate profit sharing and elective deferrals for the 2021 plan year.
- Withdrawals without penalty in case of domestic abuse. The new bill allows survivors of domestic abuse to withdraw the child under $ 10,000 or 50% of their 401 (k) account, without being subject to the 10% early withdrawal penalty. In addition, they would have the opportunity to return the money for three years.
- Expansion of the employee plan compliance resolution (EPCR) system. To alleviate the burdens associated with administering the retirement plan, this new legislation would expand the current system of corrections to allow for more self-correcting errors and exemptions from plan disqualification.
- Separate application of the main heavy rules covering excluding employees. SECURE 2.0 should make annual non-discrimination testing a little easier by allowing plans to separate certain groups of employees from major heavy testing. It is now possible to separate groups of employees in ADP, ACP and coverage tests.
- Eliminate unnecessary plan requirements related to non-enrolled participants. Plans are currently required to send numerous notices to all eligible participants. The new legislation removes certain warning requirements.
- Retired and lost retirement savings – SECURE Act 2.0 would create a lost and found online national database. So-called “missing participants” often respond to or are unaware of the funds in the corresponding 401 (k) plan.
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