Believing that defined contribution plans such as 401(k)s were not as safe as they should be after the 2019 Establishment of Every Community for Health Improvement Act was passed. retirement, Congress is again trying to achieve this with the Securing a Strong Retirement Act of 2021 (HR 2954) or SECURE 2.0.

The House passed the bill yesterday under what is known as a suspension of the rules, which is usually reserved for non-controversial legislation. The bill is now heading to the Senate, where it will likely be amended.

Self-registration for everyone (almost)

Under SECURE 2.0, all new 401(k) plans would be required to automatically enroll employees; employees would have to retire to receive their full salary. Their initial pre-tax deductions would range from 3% to 10%. Pre-tax deductions would increase by 1% each year, until they reach at least 10%. The maximum pre-tax deduction of 15% of SECURE 1.0 would be maintained.

JThe following employers would be excluded from the automatic enrollment provisions of the bill:

• Employers with current 401(k) plans.
• New employers in business for less than three years.
• Employers with 10 or fewer employees.
• Church projects.
• Government projects.

This provision would be effective for plan years beginning after December 31, 2023.

Editor’s note: Newly covered employers would enter a thicket of ERISA and tax rules they could never have anticipated. Moreover, this provision is silent on employer matching contributions. Employers, however, could significantly reduce regulatory compliance by purchasing off-the-shelf security plans from vendors.

Auto-enrollment plans may be subject to errors. The bill would also establish a safe harbor for reasonable administrative errors, provided the following criteria are met:

• The error is corrected within 9½ months of the end of the plan year in which the error occurred.
• The correction favors employees.
• The error is of a type that is corrected for all employees in a similar situation in a non-discriminatory manner.

Tax credits for start-up costs

Purchasing a safe haven plan that meets 401(k) non-discrimination tests isn’t cheap. Thus, SECURE 2.0 would modify the tax credit provisions of SECURE 1.0 (50% of administrative costs, up to $5,000 for three years) by increasing them to 100% for employers with up to 50 employees.

This provision would apply to taxation years beginning after December 31, 2022.

Minimum required distributions

SECURE 1.0 has raised the age at which employees must begin receiving the required minimum distributions no later than when they reach age 72 or April 1 following the year of their retirement. Previously, the RMD trigger was 70 and a half.

SECURE 2.0 would raise the age again to:

• 73 from January 1, 2023
• 74 from January 1, 2030
• 75 as of January 1, 2033.

Catch-up contributions

Employees age 50 or older can make pre-tax catch-up contributions to their 401(k) accounts. For 2022, the amount of the catch-up contribution is $6,500.

SECURE 2.0 would increase the amount of the catch-up contribution to $10,000 for employees aged 62, 63 or 64.

This provision would come into effect for taxation years beginning after December 31, 2022.

Student loans and 401(k) plans

Several years ago, an employer asked the IRS if it would violate 401(k) rules if it made a 5% non-optional contribution to the accounts of employees who paid off their student loans at the 2% rate. of their 401(k) qualifying compensation each pay period.

The IRS said this setup was okay, but with a ton of caveats. The main one is that the IRS notice was conveyed in a private letter authorizing this employer and the PLRs cannot be relied upon or cited as precedent.

SECURE 2.0 would allow employees repaying their student loans to receive employer matching contributions. For student loan repayments to qualify, employees would be required to certify to their employer that they have repaid their loans. Employers would be allowed to rely on these certifications.

Part-time employees

SECURE 1.0 required employers to allow long-term part-time employees (i.e. those who worked at least 500 hours per year for at least three consecutive years and who were at least 21 years old) to pay contributions before taxes in a 401(k) plan on the earlier of the first day of the plan’s first year beginning after the date they meet the age and service requirements or the date six months after the date they meet to these requirements.

SECURE 2.0 would reduce the three-year rule to two years.

This provision would be effective for plan years beginning after December 31, 2022.

Lost and found

Employers have a duty to locate missing plan members. This is often not easy to do.

SECURE 2.0 would create a national online, searchable lost and found database for the Department of Labor pension plans.

The DOL would have two years from the date of enactment of this bill to create the database.