Retirement is a time of life that many anticipate with eagerness. The opportunity to transition away from daily work responsibilities to a more relaxed pace is an important milestone. Many use the free time to be with family, and friends, pursue new passions, and travel. For this dream to become reality, it is necessary to have the appropriate retirement savings. Unfortunately, it appears many Americans will not be financially ready to retire at the traditional age. In fact, a 2022 Retirement Industry Trust Association (RITA) Study found that 1 out of 3 Americans is not confident there will be enough saved to be comfortable in retirement. Sadly, 1 in 12 believe they will never be able to retire. Although pessimistic, it is perhaps not unrealistic given the fact that only 56% of eligible workers are enrolled in an employer-sponsored retirement plan.
Retirement savings continues to be a challenging proposition for many. Although important changes were made through the SECURE Act, there has been legislation under Congressional consideration which would expand upon the legislation. The Securing a Strong Retirement Act of 2022 (the Act), affectionally called SECURE Act 2.0, was recently passed by the House and sent to the Senate for consideration. While it is almost certain there will be some minor changes, it is widely anticipated the Act will soon become law. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key changes below.
- Expanding Automatic Enrollment – Starting in 2023, the Act would require automatic enrollment for eligible employees in 401(k), 403(b), or other plan types, on the day of participant eligibility. The default elective contribution rate must be set no lower than 3% but not exceed 10%. There must also be an increase in the deferral rate of 1% annually. In cases where no investment selections have been made then the plan sponsor must follow Department of Labor guidelines for investment alternatives. Although there are several exclusions to the rule, it is anticipated that most plans will be required to comply.
- Small Employer Pension Plan Start–Up Costs Tax Credit – This tax credit is designed to help small businesses by reducing the costs of starting a new retirement plan. Under current regulations, the value of the credit is limited to 50% of administrative costs but will be increased to 100% for employers with up to 50 full-time employees.
- Employee Deferral Failures Correction Safe Harbor – Currently, employers can be subjected to fines and penalties if auto-enrollment features are not properly implemented. Unfortunately, this has served as a deterrent to offering the feature. The Act addresses this by waiving potential fees and penalties if the plan sponsor corrects administrative errors within 9 and a half months after the last day of the plan year (in which the error occurred). This change would be effective immediately upon enactment.
- Part-Time Employee Participation – Under current regulations, a part-time employee must have three years of service with a minimum of 500 hours in each to be eligible for plan participation. To encourage wider participation, the Act reduces the requirement to two years of service with a minimum of 500 in each.
- Higher Catch-Up Limits – To make it easier for older plan participants to accelerate retirement savings in a single year, the amount of allowed catch-up contributions would be increased. Currently, this contribution is limited to $6,500 for most plan types, but it would be increased to $10,000 for eligible participants between 62 and 64 years old.
- Age Increase for Required Minimum Distribution (RMD) Requirement – Most plans have a feature that forces participants of a certain age to begin taking required minimum distributions. To accommodate the reality that many Americans are living longer, and the need to keep savings invested until later in life, the original SECURE Act increased the age at which RMDs must be taken. The Act now calls for another increase in the RMD to 73 years old in the beginning of 2023, 74 in 2030, and 75 starting in 2033.
The acceleration of participation and contributions to employer-sponsored, and other retirement plans, is an important step in addressing the retirement savings gap. The proposed changes in SECURE Act 2.0 represent another significant step in that direction. If you have questions about the information outlined above or need assistance with your next 401(k) plan audit, JLK Rosenberger can help. For additional information call us at 972-931-6803 or click here to contact us. We look forward to speaking with you soon.