A bipartisan bill has been introduced in the House that would make significant changes to 401(k), 403(b), IRAs and other retirement plans. From increasing the required minimum distribution (RMD) and catch-up contributions to expanding automatic enrollment and the Saver’s Credit, the legislation is poised to expand retirement savings options for millions of individuals.
Ways and Means Committee Chairman Richard Neal (D-Mass.) and Ranking Member Kevin Brady, (R-Texas) today introduced The Securing a Strong Retirement Act of 2020. Referred to as the Secure Act 2, it follows the Secure Act that was passed into law last year.
Here are some of the key changes proposed in the legislation.
Expanded Automatic Enrollment
Regulations have permitted employers to automatically enroll employees in retirement plans since 1998. Automatic enrollment, which employees can opt out of, has boosted employee participation, particularly for Black, Latinx, and lower-wage employees, according to the House Ways and Means Committee. One study even found that automatic enrollment nearly eliminated the racial gap in enrollment rates among employees.
Increase in Saver’s Credit
The Saver’s Credit currently provides a credit of up to $1,000 for low and middle-income individuals. The new legislation would simplify the rate structure by implementing a single rate of 50%. It would also increase the credit to $1,500 per person and increase the maximum income eligibility amount.
RMD Age Increased to 75
The Secure Act generally increased the age when required minimum distributions (RMD) must be taken from 70.5 to 72. The Secure Act 2 would further increase the age when RMDs must begin to 75. The RMD would be waived for those with less than $100,000 in retirement plans and IRAs on December 31 of the year before they turn 75.
IRA Catch-Up Limit Would Rise
The current IRA catch-up limit allows those 50 or older to save an extra $1,000 a year in an IRA. Because the amount is not indexed to inflation, it never changes. Under the new law, the IRA catch-up contribution would be indexed to inflation beginning in 2022.
401(k) Catch-Up Limits Would Rise
Those 50 or older can make catch-up contributions to workplace retirement plans. The current limits for 2020 are $6,500, except that the limit is $3,000 for SIMPLE plans. The legislation would increase these limits to $10,000 ($5,000 for SIMPLE plans) for individuals who are 60 or older.
Student Loan Payments Would Qualify for Matching Contributions
Many employer retirement plans offer matching contributions. While the rules can vary from plan to plan, many match some level of the contributions employees make to the retirement plan. For many young workers, however, the cost of repaying student loans prevents them from contributing to their employer’s retirement plan and therefore taking advantage of the match.
The legislation would change this. It would allow employers to make matching contributions under a 401(k), 403(b) or SIMPLE IRA based on “qualified student loan payments.” Thus, employees could receive matching contributions by repaying their student loans.
Other Retirement Savings Changes
The legislation provides for a number of other changes:
- Increases the credit for small employer pension plan startup costs increased;
- Eliminates additional barriers to multiple employer plans that help small businesses manage the cost of 403(b) plans;
- Offers additional tax credits to employers who, among other things, make military spouses eligible to participate in their retirement plans within two months of hire;
- Enables employers to offer small financial incentives to employees who contribute to a retirement plan;
- Eases the penalties for corrections of employee elective deferral failures;
- Removes certain limitations on qualified longevity annuity contracts (QLACs) that have prevented the growth of QLACs.
- Creates an online registry designed to make it easier for individuals to locate retirement savings from employers who have moved, changed names or merged with a different company.