A look at SECURE and more
Well, that sounds familiar: Capitol Hill is considering a SECURE law. But this time it’s SECURE 2.0. In a recent webcast, Robert M. Richter, Retirement Education Advisor for the American Retirement Association, provided an update regarding the provisions of SECURE 2.0 as well as other legislation relevant to pension plans, plan members and professionals.
HR 2954, the Securing a Secure Retirement Act of 2022 – aka SECURE 2.0 – was given the green light by the House on March 29, 2022, in a landslide vote of 414 to 5. Here are the highlights of the provisions of the bill and Richter’s observations and ideas about them.
The bill establishes an automatic enrollment requirement in new defined contribution deferral plans, including 401(k) and 403(b) plans, but not for SIMPLE plans. The default rate would be 3% of salary, increasing to a maximum of 15%. However, there would be exceptions:
- employers with 10 or fewer employees;
- new employees who have been in service for less than three years;
- government plans; and
- church plans.
“It’s a mandate, but it has bipartisan support,” Richter said. He added that there’s a “strong chance” that the provision will make it into the final form of the bill, but that “we don’t know what the Senate will do.”
When it comes to long-term, part-time employees (LTPT), Richter said, “People ask – ‘Where’s the IRS advice? The answer is, who knows? adding, “The IRS is working on it. He noted that SECURE 2.0 calls for changes to the LTPT definition and provides 500 hours for two (not three) consecutive years to meet the definition. Additionally, it provides that prior service for vesting would not apply, which the American Retirement Association had advocated. He added that the ARA was working on fixes, including vesting if an employee who is LTPT becomes a full-time employee, and a very onerous exemption for certain ADP testing security plans.
Richter noted that SECURE 2.0 calls for new start dates required for required minimum distributions (RMDs); it would adjust it to age 73 from 2027 and age 75 from 2033. It would also increase the catch-up contribution cap to $10,000, but to $5,000 for SINGLES – and people age 62, 63 and 64 would qualify.
But Richter indicated that this may not all be set in stone. “It’s very costly, from a revenue perspective, to increase the required start date,” he said. “It’s more than likely that those will be changed” as the House and Senate begin to consider the revenue impact of this provision, he said.
“These are easily editable,” he said; however, Richter indicated that some sort of change is likely. “There is a consensus that the age should be increased beyond 72,” he said.
SECURE 2.0 would impose a mandate that at least one quarterly benefit statement should be delivered on paper. It’s a provision that “we’re definitely not happy with,” Richter said; however, he said, “we have still made a lot of progress in delivering the required notices electronically.” It’s “very unlikely” to go away, he added.
SECURE 2.0 would also allow:
- Reduce excise tax penalties for failed RMDs – this would halve the excise tax penalty from 50% to 25%; and it would further reduce the tax penalty to 10% if an IRA’s RMD is corrected in a timely manner.
- Eliminate the disclosure requirement for unregistered participants.
- Provide that stock attribution rules do not apply to spouses with separate businesses in communally owned states; nor would they apply to spouses with separate businesses due to 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 repayment of student loans. It would also include an ADP test disaggregation provision.
- Allow penalty-free withdrawals from retirement accounts for victims of domestic violence, up to the lesser of $10,000 or 50% of the account balance.
- Allow multiple employer 403(b) (MEP) plans.
- Comply with existing hardship allocation rules for 401(k)s through 403(b) plans.
Don’t hold your breath
Richter stressed that the provisions of SECURE 2.0 are preliminary. “We don’t really expect some kind of overall agreement between the committees that is ready to be included in a larger bill before the end of the year,” Richter said. There are four congressional committees — in the House of Representatives, Ways and Means, Education and Labor, and in the Senate, Finance and Health, Education, Labor and Pensions — that have a role to play in the measurement. To complicate matters further, Richter said, the Senate is not as advanced as the House in its idea of what SECURE 2.0 should include.
Beyond SECURE 2.0
While important, SECURE 2.0 is not the only pending legislation, nor the only proposal, relevant to pensions. Here are the highlights of the additional questions addressed by Richter.
United States Retirement Security Protection Act (HR 7310). The House Education and Labor Committee passed the bill on April 5, 2022, in a 29-21 vote, Richter said. He noted that spousal consent would be required for distributions from all plans and re-enrollment every three years. “Don’t get too excited,” Richter said, adding that he didn’t expect this to be part of SECURE 2.0. Still, he said, “don’t expect this problem to go away.”
Portman Cardin. Richter noted that this legislation includes provisions that call for:
- a new safe harbor for stretched matches;
- a credit matching contribution from the saver;
- RMDs are not required for accounts under $100,000 or designated Roth accounts;
- allow up to 10% employer contribution to SIMPLE accounts; and
- retirement planning services qualify as a non-taxable benefit.
It’s “everyone’s guess” whether these things will be incorporated into SECURE 2.0, Richter said.
Emergency savings. The goal, Richter said, is to allow emergency withdrawals from 401(k) or 403(b) plans without tax penalties and to allow reliance on participants’ statements. He said two different approaches are being considered: (1) withdrawal from the deferral account and (2) a separate side fund. That really equates to an early cast, Richter said.
There’s a proposal for a new pension plan emergency distribution option of up to $1,000 for emergencies, Richter said; the amount would have to be replenished before another distribution or distribution could take place for three years.
As for the sidecar proposal, Richter said, there would be a $2,500 limit on annual contributions to the account. Monthly withdrawals would be permitted; they would be after-tax but treated as carryforward for matching purposes.
Plan design expenses. Currently, Richter said, plan design expenses are settlor expenses that cannot be paid from plan assets. However, he noted, there is a proposal that would allow the plan design fee to be paid from plan assets.
RMD regulations. Richter discussed the proposed RMD regulations published on February 24, 2022. He stated that it is considered a reasonable interpretation of the SECURE Act to apply them now.
The main takeaways, he said, include:
- the age of majority is 21;
- relief in determining the disability of a minor; and
- detailed rules on the look-through trusts.
The IRS is seeking comments on the 403(b) disaggregation rule, Richter added.
Rules of Deputies/EPP. Richter noted that the IRS released draft regulations on the Unified Plan Rule — aka the Rotten Apple Rule — on March 25, 2022. It does not apply to open MPs who are not PEPs, said he declared. The regulations require notices (a series of three 60-day notices instead of the 90-day notices that were in the 2019 proposal). And while those regulations are in the proposed form, they can still be invoked, 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-periodic payments and qualifying rollover distributions.
Notice 2022-6. In that notice, Richter said, the IRS provides guidance on substantially equal periodic payments. It comes into effect in 2023, but can be used in 2022. The guidelines retain three methods – RMD, annuity or amortization – but impose a 5% interest rate cap on the annuity or amortization methods.
Cryptocurrency. The Department of Labor released Compliance Assistance Release 2022-01 on March 10, 2022, Richter noted. It states that investing in cryptocurrency is not prohibited; however, he said, there is a very strong inference that it is reckless and violates fiduciary duties in defined contribution plans with participant-directed investments. Plan trustees charged with overseeing these investment options or authorizing these investments through brokerage windows should expect to be questioned on how they can reconcile their actions with their duties of care and loyalty, did he declare.
Available on demand
This ASPPA webcast, “ASPPA Webcast: Washington Update – The Latest from the Hill and Agencies”, is available on demand here.