How the SECURE Act 2.0 May Change Employer Retirement Plans
There’s been an overwhelming amount of news to keep up with over the last few years. So if you haven’t been tracking the progress of legislation affecting employer retirement plans (or listening to our Fine Answers podcast), some interesting things have been happening in Washington. We might see new laws as early as 2022 that help American workers of all ages get on track with saving for retirement. And if you’re a business owner, some potential legislative changes to employer retirement plans may affect your options around offering these plans to your workers – like the SECURE Act 2.0. Here’s what’s been going on lately.
What Might Be Coming for Employer Retirement Plans: SECURE Act 2.0 and More
When the SECURE Act took effect in early 2020, both workers and business owners were affected by the changes. The required minimum distribution age was raised from 70 1/2 to 72 and the age cap for traditional IRA contributions was eliminated. The SECURE Act also made it easier for business owners to provide part-time workers with retirement accounts, and created tax credits for employers that started retirement plans—among many other changes.
The goal was to help more Americans save more for retirement, but the SECURE Act wasn’t a silver bullet. A new bill, commonly being called “SECURE Act 2.0,” could address some of the issues that the initial legislation didn’t solve. Rep. Richard Neal (D-MA) and Rep. Kevin Brady (R-TX) introduced the Securing a Strong Retirement Act to the Ways and Means committee in 2020, and its provisions could affect employer retirement plans starting as early as next year.
SECURE Act 2.0 would:
- Require many employers that offer employer retirement plans to automatically enroll eligible new employees in these plans, with the goal of getting more workers to start saving for retirement. (Employees would be able to opt out.)
- Make it easier for small businesses to offer employer retirement plans, by increasing tax credits for businesses with up to 50 employees and by simplifying paperwork requirements for employers.
- Raise the maximum age for taking required minimum distributions to 75 (up from 72, as established by the 2019 SECURE Act), giving people more time to grow their retirement savings.
- Increase the catch-up contribution limits for employer retirement plans. Under current law, a worker 50 and older can contribute an extra $1,000 to an IRA each year above their normal contribution limits. That $1,000 limit hasn’t changed since it was set in 2006. Workers over 50 can also contribute an additional $3,000 to a SIMPLE IRA or up to $6,500 to a 401(k) or 403(b). SECURE Act 2.0 would index the IRA catch-up contribution for inflation, allowing IRA owners over 50 to add even more money to these accounts. The Act would also increase limits for older workers, allowing an individual to make a catch-up contribution of up to $5,000 to a SIMPLE IRA or $10,000 to a 401(k) or 403(b) plan, starting at age 60.
- Make it easier for individuals to buy annuities, in part by removing RMD requirements for life annuities.
- Create a searchable online database of lost retirement accounts, allowing employees to track down any missing retirement funds that they’ve earned.
SECURE Act 2.0 is just one piece of retirement-related legislation that’s currently being considered in Washington. While SECURE Act 2.0 moves through the House, a similar bill (the Retirement Security and Savings Act of 2021) is before the Senate. House Democrats have also floated a legislative proposal as part of the Build Back Better Act that would require employers without employer retirement plans to automatically enroll employees in IRAs or 401(k)-type plans. Employers wouldn’t be required to make contributions to these accounts, but would pay penalties if they failed to comply with the rule. If passed, such a measure would affect many small business owners—but it’s a long way from reality at this point, so there’s no need to start planning around that possible change just yet.
Employer Retirement Plans Contribution Limits for 2022
How much will you be able to contribute to your employer-sponsored retirement accounts in 2022? The IRS typically doesn’t announce the next year’s contribution limits until late October or early November, but at least one forecast says that these limits will increase significantly next year.
Each summer, employee benefit consultant Mercer releases its projections for what the IRS contribution limits will be for the next year. The company uses several factors (including Consumer Price Index values from that year) to make its predictions, which are generally accurate. For 2022, Mercer projects the basic limit on elective deferrals to 401(k), 403(b) and 457 accounts will be $20,500, up from $19,500 for both 2020 and 2021. The company also projects limit increases for several other employer retirement plans, including 415(b) and 415(c) plans. Catch-up contribution limits are expected to remain unchanged, at least unless SECURE Act 2.0 passes and raises them.
Preparing for Employer Retirement Plan Changes
So what does all of this mean for you? Maybe nothing, right now. We’ll have plenty of notice if any legislation passes that does affect retirement savings. Don’t rush to make changes to your personal plans, or to the employer retirement plans you offer your employees. That said: If you haven’t spoken to your advisors about retirement planning recently, now’s a good time to check in and talk about whether your plans need any tweaking. Business owners should also be meeting with their advisers to strategize for 2022 and maybe even start planning for the possible passage of SECURE Act 2.0.
Sachetta Callahan is here to advise clients on all elements of retirement planning, including finding ways to maximize retirement savings using employer retirement plans. Our business consulting services also help business owners navigate the complex issues that arise around sponsoring retirement plans, allowing you to make the decisions that best support your business and your employees.
What questions do you have about employer retirement plans? Contact me today!
Eric Sachetta, ChFC®, CFP® is a Certified Financial Planner™ practitioner and focuses on financial planning and client relationship management. Eric believes that estate planning provides an opportunity to “look at all things that you value, see how they fit together, and make choices to balance everything and to maximize the things you want to do.”