Everything You Need to Know About the Proposed Secure Act 2.0

When Congress passed the Secure Act in late 2019, it was one of the largest reforms for retirement plans in years. Now, lawmakers are looking at updating it with another retirement bill tabbed Secure Act 2.0. Here's a look at where this bill stands, as well as what it could mean for you with its proposed 401(k) changes and other new rules.

Status of the Secure Act 2.0

In May 2021, the U.S. House of Representatives Ways and Means Committee passed a bill called the Securing a Strong Retirement Act of 2021.¹ They nicknamed it the "Secure Act 2.0" because it followed up on many of the changes from the original Secure Act.

The rest of Congress was supposed to vote on the bill in 2021, but it stalled when the focus shifted to President Joe Biden's Build Back Better legislation. However, in 2022, Congress may focus again on the Secure Act 2.0 among other priorities.

While the Build Back Better plan seemingly divided Congress across party lines, the retirement bill appears to have unified support. Its unanimous passage in the Ways and Means Committee involved both Democrats and Republicans. The original Secure Act had also passed on a bipartisan vote.

The current bill still has a long way to go before becoming a law. But during a recent interview, Diane Boyle, senior vice president for government relations at the National Association of Insurance and Financial Advisors, said she's "optimistic that it'll get passed" in 2022.¹

Possible Proposed Changes for Retirement Plans

Both the House and the Senate need to debate and approve this bill, and they could still make significant changes. However, the draft of the bill from the Ways and Means Committee gives an idea of what proposed 401(k) changes and other new retirement plan rules could look like:

Automatic 401(k) Enrollment

Under current law, employers who offer 401(k)s and other defined-contribution plans can choose to enroll new employees automatically. If they don't, employees have to take steps to opt in to the retirement plans and then decide how much of their paycheck to put aside. Since this puts the initiative on employees, many don't bother. As a result, they miss out on saving for retirement as well as any matching contributions from their employer.

The Secure Act 2.0 would make automatic enrollment mandatory for any new 401(k) or defined contribution plan launched after the bill passes.² Employers would enroll employees starting with at least 3% of their paychecks under the bill's guidance. That amount would increase by 1% each year until reaching at least 10% but not more than 15% of the employee's pay (the employer would decide).

Under the proposed law, employees would be able to adjust their retirement withholding or opt-out altogether, but they would have to make those changes proactively.

Increased 401(k) & IRA Catch-Up Contributions

While workers younger than 50 years old are held to retirement contribution limits, older workers can currently contribute more per year through catch-up contributions. In 2022, anyone younger than 50 can contribute up to $20,500 per year to a 401(k). People 50 or older can add another $6,500 a year, allowing them to contribute up to $27,000 total.

The new bill would allow workers ages 62-64 to put aside an extra $10,000 a year for their catch-up contributions.² And this amount would increase based on inflation.

The proposed bill would also moderately boost catch-up contributions for individual retirement accounts (IRAs). Under current law, people 50 or older can put an extra $1,000 per year into an IRA for catch-up contributions. This amount does not automatically increase due to inflation, though. The Secure Act 2.0 would adjust the IRA catch-up contribution each year for inflation, giving savers a modest increase over time.

MORE The Impact of Inflation on Your Savings & Investments

After-Tax Money for Catch-Up Contributions

When someone makes a catch-up contribution to their retirement plans, they have two options. They can make pretax contributions to a traditional IRA or 401(k) and delay paying income tax on the money until they withdraw it in retirement. Or they can make after-tax contributions to a Roth IRA or Roth 401(k) and pay income tax on the money now instead of when they withdraw it in retirement.

The Secure Act 2.0 would change the law so that catch-up contributions could only be made with after-tax contributions.³ The change would have workers paying taxes on the income sooner. This money would help the government offset the costs of other parts of this bill.

After-Tax Money for Matching Contributions

Currently, when an employee receives a matching contribution from their employer in a 401(k), it's a pre-tax contribution. Under the Secure Act 2.0, employees would have the option to receive some or all the employer match as an after-tax contribution.³ That way, once they retire and withdraw that money — including investment gains, if any — the income tax on it will already be paid.

More Access to Workplace Plans for Part-Time Employees

The original Secure Act made it easier for part-time workers to join their workplace retirement plans. Before it, they could only enroll in a 401(k) if they had worked for the company at least 1,000 hours in a year (about 20 hours a week). The law made it so that, currently, part-time employees can join an employer's retirement plan starting in 2024 if they have worked at least 500 hours a year (about 10 hours a week) for three years. The Secure Act 2.0 would allow workers to be eligible starting in 2023 and shorten the required working time to just two years.³

Matching Contributions for Student Loan Payments

Workers who are paying off student loans can struggle to save for retirement. This may mean they also miss out on employer matching contributions.

The proposed bill would allow employers to offer retirement plan matching contributions based on an employee's student loan payments.⁴ For example, say an employee pays $5,000 a year toward student loans. Their employer could calculate a 401(k) match as if the employee had put that $5,000 in their 401(k).

While the Internal Revenue Service (IRS) has issued rulings suggesting this is already OK, employers have been hesitant to do it because it's not in a formal law passed by Congress. The Secure Act 2.0 would create this law.

Later Ages for Mandatory Retirement Distributions

Pre-tax retirement plans like 401(k)s and traditional IRAs delay taxes on income. The government eventually wants to collect. That's why they set an age limit where people need to start taking required minimum distributions (RMDs). At that age and after, if someone doesn't take out enough money from their retirement in a year, the IRS charges a tax penalty.

The original Secure Act changed the age that RMDs must start from 70½ to 72 to give people more time to grow their savings. The new bill would push to start RMDs even later. It would first increase the age limit to 73, then to 74 in 2029, then again to 75 in 2032 to keep up with increasing life expectancies.⁴

Reduced Penalties for Missed RMDs

The RMD penalty is quite severe. It's currently 50% of what should have been withdrawn.⁴ If someone missed taking an RMD of $10,000, they would owe a tax penalty of $5,000. The new bill would reduce this penalty to 25%. It would also give retirees the ability to fix any mistakes by withdrawing the appropriate amount and then paying a penalty of just 10%.

MORE How Does a 401(k) Work When You Retire?

Database for Lost Retirement Plans

While it might seem strange to lose track of retirement savings, it happens frequently. There are roughly 24 million lost 401(k)s with over $1.3 trillion in savings, according to a 2021 white paper from Capitalize.⁵ This sometimes happens because an employee left their job, didn't take their retirement savings with them and forgot about it. An old account can be even harder to find if a past employer no longer exists.

State governments have missing money and property departments for these accounts, but they are not coordinated across the country. This makes tracking down retirement plans complicated. The proposed Secure Act 2.0 would create a national database of lost plans.

Other Important Changes

Some of the other changes proposed by the bill include these:

• Letting workplace retirement plans offer lifetime income annuities as investments (turning your savings into income for life, like a personal pension)
• Creating rules to make it easier to correct mistakes from using retirement plans without penalties, such as the mishandling of a 401(k) loan
• Giving 403(b)s more design features like those currently available with 401(k)s
• Requiring the Treasury secretary to better promote the Retirement Savings Contributions Credit (which helps low- and moderate-income taxpayers save for retirement)

Preparation Strategies That Could Help

If it passes in its current format, the Secure Act 2.0 wouldn't dramatically overhaul the retirement system. But it would create new benefits and options for retirement savers. If you already have some sort of retirement plan, you might want to consider some of the new rules, like increasing your catch-up contributions or using after-tax matching contributions from your employer rather than pre-tax ones.

In anticipation of these potential changes, it may be worth meeting with a financial professional to review your individual situation. Together, you can start planning what adjustments you might want to make if this bill passes. As part of this discussion, you could also make sure you're up to date with all the changes from the original Secure Act.

Sources

1. Fortuna N. A stalled retirement bill could be passed in 2022. What it will mean for you. Barron's. Barron's. Published January 3, 2022. Accessed February 21, 2022.
2. Tepper T. Secure Act 2.0: Will it help you save for retirement? Forbes. Forbes. Last updated July 26, 2022. Accessed October 19, 2022.
3. Miller S. Congress considers 'Secure Act 2.0' with a new round of retirement plan fixes. Society for Human Resource Management. Society for Human Resource Management. Published May 11, 2021. Accessed February 21, 2022.
4. Riiska M. What Americans need to know about the Secure Act 2.0. BenefitsPRO. BenefitsPRO. Published September 16, 2021. Accessed February 21, 2022.
5. The true cost of forgotten 401(k) Accounts. Capitalize. Capitalize. Last updated June 2, 2021. Accessed October 19, 2022.