Well, this sounds familiar: Capitol Hill is considering a SECURE Act. But this time it’s SAFE 2.0. In a recent webcast, Robert M. Richter, Advisor on Aging Education for the American Retirement Association, provided information on the provisions of SECURE 2.0 and other laws of interest to retirement plans, participants and professionals.
HR 2954, the Securing a Strong Retirement Act of 2022 – also known as SECURE 2.0 – received the House of Representatives nod on March 29, 2022 by an overwhelming majority of 414 to 5. Following are highlights of the bill’s provisions and Judge’s observations and insights about them.
The bill establishes a requirement for automatic enrollment in new defined contribution deferral plans, including 401(k)s, 403(b)s, but not SIMPLE plans. The default rate would be 3% of salary and would escalate to no more than 15%. However, there are exceptions:
- employers with 10 or fewer employees;
- new employees who have been in business for less than three years;
- government plans; and
- church plans.
“It’s mandated, but it has bipartisan support,” Richter said. He added that there was a “strong chance” that the provision would end up in the final form of the bill, but that “we don’t know what the Senate will do.”
Regarding long-term part-time employees (LTPT), Richter said, “People ask, ‘Where’s the IRS policy?’ The answer is, who knows?”, adding, “The IRS is working on it.” He noted that SECURE 2.0 requires changes to the definition of LTPT and requires 500 hours for two (not three) consecutive years to to meet the definition. In addition, it provides that prior service does not apply to vesting, which the American Retirement Association advocated. He added that the ARA has been working on fixes, including vesting when an employee who is LTPT becomes a full-time employee and a top-heavy exemption for certain ADP Test Safe Harbor plans.
Richter noted that SECURE 2.0 requires new required starting dates for required minimum distributions (RMDs); it would adjust it to 73 years from 2027 and 75 years from 2033. It would also raise the catch-up contribution limit to $10,000, but $5,000 for SIMPLEs — and those ages 62, 63, and 64 would be eligible.
But Richter pointed out that this may not be all set in stone. “From a revenue perspective, increasing the required start date is very expensive,” he said. “It’s more than likely to be tinkered with,” he said, as the House and Senate begin to study the revenue implications of this provision.
“These are easy to change,” he said; However, Richter pointed out that some kind of change is likely. “There is consensus that the age should be raised above 72,” he said.
explanations on paper
SECURE 2.0 would require that at least one quarterly paper claim be served. A provision “we’re definitely not happy about,” Richter said; However, he said: “Nevertheless, we have made great strides in delivering the required notices electronically.” It was “very unlikely” that this would go away, he added.
SECURE 2.0 would also:
- Reducing excise penalties for RMD errors – this would halve the excise penalty from 50% to 25%; and it would further reduce the tax penalty to 10% if the RMD is corrected in a timely manner by an IRA.
- Eliminate disclosure requirements for unregistered attendees.
- Ensure that share attribution rules do not apply to spouses with separate businesses in common ownership states; Nor would they apply for spouses with separate businesses because of a minor child.
- Increase the mandatory withdrawal threshold from $5,000 to $7,000.
- Address student loan matching programs by allowing matching contributions based on student loan repayment. It would also include a disaggregation determination for ADP testing.
- Provide penalty-free retirement account withdrawals for victims of domestic violence — up to $10,000 or 50% of the account balance, whichever is less.
- 403(b) allow multiple employer plans (MEPs).
- Compliance with existing hardship distribution rules for 401(k)s through 403(b) plans.
Don’t hold your breath
Richter emphasized that the provisions of SECURE 2.0 are preliminary. “We don’t really expect a comprehensive agreement between the bodies that could feed into a larger bill by the end of the year,” Richter said. There are four congressional committees — in the House, Ways and Means, and Education and Labor, and in the Senate, Finance and Health, Education, Labor and Pensions — that have roles in the measure. To make matters worse, Judges said, the Senate isn’t as far along as the House in terms of its vision of what SECURE 2.0 should encompass.
Beyond SAFE 2.0
While important, SECURE 2.0 is not the only pending legislation or proposal relevant to retirement plans. Below are highlights of additional topics that Richter discussed.
Protection of the US Retirement Security Act (HR 7310). The House Education and Labor Committee passed the law by a vote of 29 to 21 on April 5, 2022, Richter said. He noted that spousal approval is required for distributions from all plans and a re-registration every three years. “Don’t get too excited about it,” Richter said, adding that he doesn’t expect it to be part of SECURE 2.0. Still, he said, “don’t expect this topic to die out.”
Portman Cardin. Judges pointed out that this law contains provisions that require:
- a new safe haven for stretch matches;
- credit adjustment contribution of a saver;
- RMDs are not required for accounts under $100,000 or designated Roth accounts;
- allow an employer contribution of up to 10% on SIMPLE accounts; and
- Qualified retirement provision services as a tax-free benefit.
Whether these things will be integrated into SECURE 2.0 is “foreseeable,” said Richter.
emergency savings. The goal, Richter said, is to allow emergency withdrawals from 401(k) or 403(b) plans without tax penalties and to make it possible to rely on participant testimony. He said two different approaches are being considered: (1) withdrawal from the deferred account and (2) a separate sidecar fund. It really boils down to early distribution, Richter said.
There is a proposal for a new emergency distribution option from pension plans of up to $1,000 for emergencies, Richter said; the amount would have to be replenished before a further distribution or a further distribution could not be made for three years.
Regarding the sidecar proposal, Richter said there was a $2,500 limit on annual contributions to the account. Monthly withdrawals would be allowed; they would be after tax but treated as accruals for matching purposes.
Plan design costs. Right now, Richter said, plan design costs are settlor costs that cannot be paid from plan assets. However, he noted that there is a proposal that would allow plan design costs to be paid out of plan assets.
RMD regulations. Richter discussed the proposed RMD regulations issued on February 24, 2022. He said it was considered a reasonable interpretation of the SECURE Act to apply them now.
Key findings, he said, include:
- Legal age is 21 years;
- facilitating the determination of a minor’s disability; and
- detailed rules on appearance-through trusts.
The IRS is asking for input on the 403(b) disaggregation rule, Richter added.
MEPs/PEPs Regulations. Richter noted that on March 25, 2022, the IRS issued proposed regulations on the unified plan rule — also known as the one bad Apple rule. It does not apply to open MEPs who are not PEPs, he said. The regulations require notices (a series of three 60-day notices instead of the 90-day notices included in the 2019 proposal). And while those regulations are in proposed form, they can still be relied upon, Richter said.
W-4P and/or W-4R. Mandatory use of W-4P and/or W-4R is deferred to 2023, Richter said, noting that W-4R is the new withholding certificate for non-recurring payments and eligible rollover distributions.
Notice 2022-6. In that notice, Richter said, the IRS provides guidance for essentially equal periodic payments. It will come into force in 2023, but can be applied in 2022. The guidelines retain three methods – RMD, annuitization or amortization – but impose a 5% interest rate cap on annuitization or amortization methods.
cryptocurrency. The Department of Labor issued Compliance Assistance Release 2022-01 on March 10, 2022, Richter noted. It states that investments in cryptocurrency are not prohibited; however, he said, there is a very strong implication that it is imprudent and violates fiduciary duties in defined contribution plans with participant-controlled investments. Plan trustees responsible for overseeing such investment options or approving such investments through brokerage windows should expect to be questioned about how to balance their actions with their duty of care and loyalty, he said.
Available upon request
This ASPPA webcast, “ASPPA Webcast: Washington Update – The Latest from the Hill and Agencies,” is available upon request here.