Tax Strategy: Will we see SECURE 2.0 enacted, and when?

September 21, 2021 9:00 AM

The Securing a Strong Retirement bill (SECURE 2.0) was unanimously passed out of the House Ways and Means Committee on May 5, 2021. It has broad bipartisan support, yet it remains unclear what its route to enactment might look like. The Senate is working on its own versions of retirement plan legislation, which are similar but not identical. The budget reconciliation bill seems the most likely vehicle for passage this year, but Democrats may prefer to keep budget reconciliation revenue to support provisions that do not have bipartisan support. Also, some provisions of SECURE 2.0 may not qualify under budget reconciliation. Most commentators seem to think the legislation will somehow pass this year, but are uncertain as to just how that will happen.

Building on the provisions of the SECURE Act enacted in 2019, SECURE 2.0 has many popular provisions that should help people save for retirement. The criticisms center mainly around some of the complexity associated with some of the phase-ins and phase-outs and whether it will really make a significant impact on the people who are not saving enough for retirement.

While most commentators expect a retirement package to pass by year-end, the form that will take is uncertain. It appears that SECURE 2.0 as passed by the Ways & Means Committee is likely to be modified somewhat by the Senate, either by substituting their own bill or modifying the Ways & Means version.

With SECURE 2.0 continuing to not require employers to offer retirement plans and continuing to allow employees to opt out of retirement plans that are offered, there remains concern about how effective it would be in increasing retirement savings for the average employee. Mandatory proposals, such as the Senate’s Automatic IRA plan, may fall victim to a court challenge that it violates the ERISA preemption standards for voluntary compliance. State automatic IRA plans have survived court challenges because they are administered by a state and not imposed on private employers.

Congress has a great deal on its agenda this fall, and it is hoped that these retirement plan reforms will not somehow fall through the cracks.

In the meantime, here are some of the major provisions of the potential legislation.

Automatic enrollment

SECURE 2.0, as passed out of Way and Means, would require employers offering 401(k), 403(b), and SIMPLE IRA plans to enroll new eligible employees at an initial 3% payroll deduction rate, with that rate increasing by one percentage point each year until it reaches 10%. Employers would still not be required to offer plans, employees could still opt out of coverage, and a few exemptions are provided for small businesses, new businesses and certain tax-exempt organizations. In the Senate, an automatic IRA bill has been introduced that would require larger employers to enroll employees in IRAs with automatic payroll deductions. A few states already offer such programs, with states rather than private employers offering the plans. There is some concern that a federal mandate on private employers to offer the plans would violate ERISA. Even with opt-out provisions, automatic enrollment programs have been shown to dramatically increase participation.

Delay required minimum distributions

The 2019 SECURE Act delayed the age to commence required minimum distributions from 70½ to 72. SECURE 2.0 would further delay the age over several years until it reaches age 75 for people who reach age 74 after Dec. 31, 2031. With most retirees needing to withdraw retirement savings for support in retirement, some have questioned whether the delayed age primarily only helps wealthier retirees. Although not included in SECURE 2.0, some proposals would limit the tax benefits for very large retirement accounts exceeding $5 million.

Enhance annuities

SECURE 2.0 would follow up on prior legislation to make it even easier for retirement savings to be used to purchase qualified longevity annuity contracts by increasing the amount of retirement savings that can be put into QLACs. QLACs can help ensure that an individual will not outlive their retirement savings, but the programs can also limit the potential growth in retirement savings during retirement.

Student loan borrowers

Employers who have employees who need to pay off student loans would be able to match the student loan payments with matching contributions to the employee’s retirement account up to a percentage of the employee’s compensation. The employee would not be required to make their own contribution to the retirement account. These employees could be separated for purposes of qualification under the average deferral percentage discrimination test.

Retirement plan lost and found

SECURE 2.0 would provide that, where the owners of retirement plans cannot be located, the accounts would be maintained by the federal government until the owners can be found. There has been some concern expressed that the provision only offers minimal earnings while held by the government and it might be better to let the lost plans be maintained by private entities traditionally handling plan investments.

Administrative simplifications

SECURE 2.0 provides additional time for employers to adopt plan amendments, relaxes some compliance testing, and expands self-correcting measures, including a safe harbor for corrections of employee elective deferral failures. On July 15, 2021, the IRS also published Revenue Procedure 2021-30, making several changes favorable to plan administrators to the Self-Correction Program and the Voluntary Correction Program under the Employee Plans Compliance Resolution System.