Author: Steven Grieb
Summary of the Securing a Strong Retirement Act of 2020
On October 27, 2020, Ways and Means Committee Chairman Richard E. Neal (D-MA) and Ranking Member Kevin Brady (R-TX) introduced the Securing a Strong Retirement Act of 2020 (the “Act”). Neal and Brady originally introduced the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”) of 2019. The Act builds on the SECURE Act provisions to further improve workers’ long-term retirement security and financial wellbeing, and is being referred to as SECURE 2.0. Note that the Act has not been passed by either the Senate or the House of Representatives, and the provisions may change as the bill proceeds.
While more detailed descriptions of the Act’s provisions are below, highlights include:
- Requiring newly established 401(k), 403(b) and SIMPLE plans to automatically enroll participants;
- Expanding self-correction opportunities, including for participant loan errors and employee elective deferral failures;
- Permitting plan sponsors to contribute an employer match for participants who are repaying student debt;
- Adding a higher catch-up limit for participants at age 60;
- Increasing the required distribution beginning date age to 75;
- Increasing tax credits for small employers that adopt new plans;
- Simplifying and increasing the existing Saver’s Credit for low and middle income taxpayers who contribute to a retirement plan or IRA;
- Expanding retirement savings options for not for profit employers by permitting 403(b) plans to be established as multiple employer plans;
- Reducing the excise tax on missed required minimum distributions; and
- Creating a national database to assist taxpayers to locate lost retirement savings.
Expanding automatic enrollment. The Act would require all newly established 401(k), 403(b) and SIMPLE plans to automatically enroll participants. The employees may opt out of deferring into the plan. But for employees that do not make an affirmative election, the initial automatic enrollment default rate must be at least 3 percent but no more than 10 percent. The default rate must be increased each year by 1 percent until it reaches 10 percent. The requirement will not apply to existing 401(k), 403(b) and SIMPLE plans. The Act also contains exceptions for businesses with 10 or fewer employees, new companies that have been in business for less than 3 years, church plans and governmental plans.
Revision of the Employee Plans Compliance Resolution System. The Act would expand the Employee Plans Compliance Resolution System (EPCRS) to allow plans to self-correct virtually any operational error, regardless of how long ago the error occurred (unless the IRS catches an uncorrected error during an audit). Plans would still have to establish reasonable practices and procedures to be eligible for self-correcting errors. The Act would also apply EPCRS corrections to some IRA errors. Self-correction would continue to be unavailable for egregious errors or the diversion or misuse of plan assets.
Permit matching contributions on student loan payments. The Act would permit a plan sponsor to make matching contributions to a 401(k) plan, 403(b) plan, SIMPLE IRA or governmental 457(b) plan based on the participant’s repayment of student debt. This type of benefit would not assist the employee in repaying their student loans. But it would increase their retirement security by allowing them to receive matching contributions at a time when they might not otherwise be saving for retirement.
Higher catch-up contribution for participants at age 60. Participants who have attained age 50 may make catch-up contributions to their retirement plan above the general 402(g) cap. The limit on catch-up contributions for 2021 is $6,500. In SIMPLE plans, the 2021 limit equals $3,000. The Act would increase these limits to $10,000 and $5,000 respectively (both indexed for inflation) for participants who have attained age 60.
Increase in required distribution beginning date age. The SECURE Act increased the required beginning date for plan distributions from age 70½ to age 72. The Act would increase the required beginning date further to age 75.
Tax credits for small employer retirement plan startup costs. The Code currently allows small employers a tax credit for three years when starting a retirement plan. The credit equals 50% of administrative costs, up to an annual maximum of $5,000. The Act would increase the credit to 100% of expenses for employers with up to 50 employees. The Act gives an additional credit for defined contribution plans equal to the amount contributed by the employer on behalf of employees, up to $1,000 per-employee. The full credit would be available to employers with 50 or fewer employees, but would be phased out for employers with between 51 and 100 employees. Eligible plan sponsors could take the full tax credit in the first and second years, 75% of the credit in the third year, 50% of the credit in the fourth year, and 25% of the credit in the fifth year. The Act provides no credit for employer contributions after the fifth year.
Simplification and increase in Saver’s Credit. The Saver’s Credit is a Code provision that provides low and middle income individuals with a tax incentive to save for retirement. If certain requirements are met, the provision allows the individual a tax credit on their 1040 for contributions made to retirement plans or an IRA. The rate of the credit depends upon the individual’s income level. The Act simplifies the Saver’s Credit to create a single tax credit rate equal to 50% of the contribution amount. The bill also would increase the maximum credit amount from $1,000 per person to $1,500, and would make the credit available to taxpayers with higher income. The $1,500 maximum credit would be adjusted for inflation each year.
Multiple Employer 403(b) Plans. The SECURE Act made MEPs more attractive by permitting Pooled Employer Plans (PEPs) effective in 2021. But a PEP could not be established as a 403(b) plan. The Act would allow 403(b) plans to participate in MEPs, generally under the SECURE Act rules.
Reduction in excise tax for missed RMDs. The Code imposes a 50% excise tax on any missed RMDs. The Code imposes the excise tax on the participant, not the plan or the plan sponsor. The Act would reduce the penalty for failure to take RMDs from 50 to 25 percent. If a failure is in an IRA, the Act further reduces the excise tax from 25 percent to 10 percent, if the error is corrected timely.
Retirement savings lost and found. The Act would create a national, online lost and found program for Americans’ retirement accounts, run by the Pension Benefit Guarantee Corporation. The intent is to assist people who are unable to find and receive the benefits that they earned because the company they worked for moved, changed its name or merged with a different company. The program would also assist plans that are unable to find participants because the former employees changed their names or addresses.
Reduction in eligibility requirement for long-term, part-time workers. The SECURE Act requires employers to allow long-term, part-time workers to defer into their 401(k) plans once the employee has worked three consecutive years during which they complete at least 500 hours of service in each year. The Act allows those long-term, part-time workers to defer earlier by reducing the three-year rule to two years.
Remove certain barriers for life annuities. Treasury regulations relating to required minimum distributions (“RMDs”) contain a rule intended to limit tax deferral by precluding annuity products from providing payments that start out small and increase over time. The test can prohibit provisions that provide only modest benefit increases under life annuities. For example, the test can prevent guaranteed annual increases of only 1 or 2%, return of premium death benefits and period certain guarantees. The Act would eliminate this restriction, allowing for more flexibility in annuities paid from qualified retirement plans.
Increases in permissible qualifying longevity annuity contracts. Qualifying longevity annuity contracts (“QLACs”) are deferred annuities that begin payment well after retirement. QLACs are a way for retirees to hedge against the risk of outliving their retirement savings. The Act contains provisions making use of QLACs more practical. The treasury regulations exempt QLACs from the RMD rules until payments commence. However, the regulations imposed certain limits on the exemption. The Act would repeal the limit that the QLAC premium cannot exceed 25% of the participant’s account balance and raise the limit on the overall amount of the premium payment from $135,000 to $200,000. The bill also would allow for QLACs with spousal survival rights.
Exchange-traded funds for annuity products. Exchange-traded funds (ETFs) are pooled investment funds. Unlike mutual funds, their shares are traded on stock exchanges, and can be traded throughout the day on the stock market, rather than having to wait until after the market closes. ETFs are used commonly in qualified retirement plans and IRAs. However, Treasury regulations prevent ETFs from being available through annuities. The Act directs the Treasury department to update the regulations to facilitate the creation of a new type of ETF that is “insurance-dedicated”, allowing annuity products to invest.
Eliminating RMDs for individuals with smaller retirement savings. Currently, the Internal Revenue Code (the “Code”) requires participants to begin taking distributions from their retirement plan at age 72. The Act would provide that participants in defined contribution plans need not take RMDs if they have a balance in their retirement plans and IRAs of $100,000 or less on December 31 of the year before they attain age 75. The $100,000 amount will be adjusted for inflation. Plans can rely on certifications from participants regarding whether their total balance (counting other savings in IRAs or with other employers) equal $100,000 or less.
Eliminating disclosure requirements for unenrolled participants. ERISA and the Code require plan sponsors to provide numerous disclosures to employees that are eligible for a qualified retirement plan. For eligible employees who have not elected to participate in the plan (“unenrolled participants”), these notices may be unnecessary. The Act relieves defined contribution plans from the requirement to provide ERISA or Code notices to unenrolled participants. The plan would still be required to send an annual reminder notice of the participant’s eligibility to participate in the plan. If the participant requests a copy of any otherwise required disclosure, the plan sponsor must provide it. Plans must still provide unenrolled participants all required notices relating to initial eligibility under the plan, such as the SPD.
Benchmarks for funds with mixed asset classes. The DOL’s participant fee disclosure rule requires defined contribution plans to provide participants with each investment alternative’s historical performance, benchmarked against an appropriate index. The rule does not address appropriate benchmarks for investments that include a mix of asset classes (such as target date funds). The Act directs the DOL to amend its regulations so that an investment that uses a mix of asset classes can be benchmarked against an appropriate blend of broad-based securities market indices. This adjustment to the participant fee disclosure rules is intended to assist participants in selecting investments by providing better comparisons.
Requirement to provide paper statements in certain cases. Defined contribution plans that allow participants to direct investments must provide participants with quarterly benefits statements. The Act would require retirement plans to provide a paper benefit statement at least once annually, unless a participant affirmatively elects otherwise. The other three quarterly statements could be provided electronically if certain requirements are met. For defined benefit plans, the participant statement that the plan must provide once every three years must be in paper form, unless a participant affirmatively elects otherwise. This rule would be a departure from current rules that allow for all participant benefit statements to be delivered electronically if certain requirements are met.
403(b) plan investments. The Code generally limits 403(b) plan investments to annuity contracts and mutual funds. 403(b) plan participants have no access to collective investment trusts, which 401(a) plans use frequently due to their lower fees. The Act permits 403(b) plans funded through custodial accounts to invest in collective investment trusts.
Deferral of tax for certain sales to an employee stock ownership plan (ESOP). Currently, an individual who owns stock in a non-publicly traded C corporation that sponsors an ESOP can sell their stock to the ESOP and may elect to defer taxes from the sale by reinvesting the proceeds into “qualified replacement property” (i.e., stock issued by a U.S. corporation). The ESOP must meet a number of requirements for the seller to receive this tax deferral. The Act would extend this tax deferral rule to sales of employer stock to S corporation ESOPs.
Cost of Living Adjustments for IRA catch-up limit. For taxpayers who have attained age 50, the limit on IRA contributions is increased by $1,000. This IRA catch up limit is not indexed for cost of living adjustments. The Act would index the $1,000 IRA catch up limit for inflation starting in 2022.
Military spouse retirement plan eligibility credit for small employers. The Act gives small employers a tax credit with respect to their defined contribution plans if they:
- Make military spouses eligible to participate within two months of hire,
- Upon eligibility, make military spouses eligible for any matching or nonelective contribution, and
- 100% vest military spouses in all employer contributions.
The employee must be non-highly compensated. The tax credit would equal (1) $250 per military spouse, plus (2) 100% of all employer contributions (up to $250) made on behalf of the military spouse. That’s a maximum tax credit of $500. This credit is available for three years with respect to each military spouse. Plan sponsors may rely on the employee’s certification that their spouse is a member of the military.
Permitting small financial incentives for deferring into a plan. The Act would permit plan sponsors to provide small financial incentives to employees for deferring into a 401(k) plan or 403(b) plan, such as gift cards in small amounts. Individuals can be motivated by immediate financial incentives, even if small. Offering small immediate incentives could increase participation rates.
Safe harbor for corrections of employee elective deferral failures. The Act would allow for a grace period to correct, without penalty, reasonable errors in administering automatic enrollment and automatic escalation features. The errors must be corrected within 9½ months after the end of the plan year during which the error originally occurred. The Act would leave the question of precisely how to correct this type of error with the Treasury department. The EPCRS already allows for correction of failures to auto-enroll by the same 9½ month deadline without any corrective QNEC for the missed deferral (although the correction would require a participant notice and a full corrective contribution for any missed matching contribution).
Recovery of overpayments. Sometimes defined benefit plans mistakenly pay more money to a participant than they are owed. Requesting that the participant return the incorrect distributions to the plan can create significant hardship for the participant. The Act would allow retirement plan fiduciaries the latitude to decide not to recoup overpayments that were mistakenly made to retirees, or to amend the plan document to increase benefits to make the document consistent with the extra payments. Plans would still have the right to request a return of the overpayment or to reduce future payments to the participant if they chose (Currently, the EPCRS indicates that an appropriate correction method could be contributing the amount of the overpayment instead of seeking recoupment from the participant.). Additionally, if the participant rolled the incorrect distribution to an IRA, the rollover would remain valid.
Eliminate the “first day of the month” requirement for deferral elections in governmental 457(b) plans. Unlike 401(k) plans or 403(b) plans, participants in a governmental 457(b) plan must request changes in their deferral rate prior to the beginning of the month in which the deferral will be made. The Act would allow such elections in governmental 457(b) plans to be made at any time prior to the date that the compensation being deferred is made available to the participant.
Retirement plan distributions to charitable organizations. Taxpayers over 70½ can give up to $100,000 to charity directly from their IRA without including that distribution as taxable income. The Act would expand the IRA charitable distribution provision to also include distributions from qualified retirement plans.