The SECURE Act put in place important steps to close the retirement savings gap. These included many provisions encouraging plan adoption and retirement income accumulation. Building on the framework of the SECURE Act, Representatives Richard Neal and Kevin Brady have introduced the Securing a Strong Retirement Act of 2020, already being referred to as SECURE Act 2.0. SECURE Act 2.0 contains changes that would further encourage plan adoption and retirement savings, as well as solutions to operational problems that have bedeviled plan sponsors for many years.
Incentives to Increase Retirement Savings.
1. Require New Plans to Have Automatic Enrollment.
Surveys confirm that automatic enrollment increases retirement savings. SECURE Act 2.0 would require most new 401(k) and 403(b) annuity plans to have automatic enrollment provisions requiring contributions of 3-10% of pay, with exceptions for small plans with 10 or fewer employees, governmental and church plans, and new businesses during their first 3 years. Automatic escalation would increase default contributions by 1% a year until they reached 10% of pay. Participants could opt out as under current law. These plans would be required to have a qualified default investment alternative permitted by Department of Labor regulations. The new requirement would be effective beginning in 2022.
2. Required Minimum Distributions May Commence Later.
The complicated required minimum distribution rules require plan and IRA participants to begin to draw down money beginning after a specified age, regardless of whether they need it. The penalty for failure to follow them can be up to 50% of the amount not taken. In addition, Americans are living longer and retiring later. Benefits can continue to compound on a tax deferred basis if allowed to remain longer in a tax-favored retirement plan.
The SECURE Act changed the age at which benefits must commence from 70 ½ to 72. SECURE Act 2.0 would further increase the age at which required distributions must begin to 75 for individuals who were not 72 as of December 31, 2020 and would exempt those with defined contribution plan/IRA balances up to $100,000 measured at age 75 from having to take required minimum distributions. The maximum penalty would go down to 25% of the amount not taken.
3. More Flexible Annuity Payments.
The Secure Act made it easier for defined contribution plans to include annuity options, which can insure that participants don’t outlive their retirement income. The required minimum distribution rules, with a few exceptions, prohibit non-level payments, which may discourage participants from electing annuities. SECURE Act 2.0 would:
· Permit features that provide increased benefits in later years and return of premium death benefits.
· Increase the maximum amount available to purchase a qualified longevity annuity contract, (QLAC), a form of annuity that commences payments after the required beginning date, from the lesser of $125,000 or 25% of the account balance to $200,000.
4. Plans Can Match Student Loan Repayments
Younger participants may be prevented from contributing to 401(k) and 403(b) plans by the burden of student debt repayments. SECURE Act 2.0 enables plans to match qualifying student loan repayments, which was not permitted by prior IRS guidance.
More Incentives to Increase Retirement Savings.
SECURE Act 2.0 contains additional incentives to encourage plan formation and participant contributions.
· To encourage plan startups, the new plan tax credit available for small employers with up to 50 employees would be increased to 100% of administrative costs up to $5000, and an additional credit beginning at 100% of contributions to a defined contribution plan would be available through the fifth year, but the credit would be capped at $1000 per employee. Employers with 51-100 employees would be eligible for a reduced credit. The new plan credit would be available to employers participating in a multiple employer plan (MEP) even if the MEP has been in existence for 3 years.
· The Savers’ Credit for low and middle income participants would be simplified and increased.
· The $6500 catchup contribution currently available to participants age 50 and older in addition to the regular annual deferral limit would be increased to $10,000, indexed for inflation, for participants 60 and older.
· The eligibility service period for long term part-time employees to qualify to contribute to 401(k) and 403(b) plans would be shortened from 3 years to 2 years of service.
· The new Pooled Employer Plan (PEP) option created by the SECURE Act to make professionally managed plans available to smaller employers would be available to 403(b) annuity plans.
Some Fixes for Plan Administration Problems.
1. Missing Participants.
Many terminated participants and beneficiaries don’t update their contact information. The plan owes them vested benefits, but mail to them is returned as undeliverable. Although fiduciaries must try to find these lost participants, many former employees are not aware that their former employers’ plans owe them benefits.
SECURE Act 2.0 would create a federal Office of Retirement Lost and Found to be managed by the PBGC to maintain a database of unclaimed benefits. The IRS, Department of Labor and the PBGC would be directed to issue regulations defining missing participants. Participants could use the database, which would include information from filings already required to be made to the IRS, to access benefit information, including plan sponsor contact information.
2. Expanded Self-Correction of Qualification failures
The qualified plan rules are so complicated that good faith administrative errors are common. The IRS has established correction procedures to permit these errors to be corrected without disqualifying the plans, under a program called the Employee Compliance Resolution System (EPCRS), but the rules restrict the situations in which corrections may be made without making a formal application to the IRS.
SECURE Act 2.0 would permit self-correction of inadvertent compliance errors at any time before IRS identified the violations. SECURE Act 2.0 would also provide that inadvertent failure to include participants under automatic enrollment provisions could be corrected without penalty within 9 ½ months, regardless of whether identified by the IRS, and make it unnecessary to request formal relief for corrected plan loan errors from the IRA and the Department of Labor. Finally, the program would be expanded to permit IRA trustees and custodians to correct certain errors.
3. New Rules for Recouping Plan Overpayments.
Plan overpayments discovered many years after the fact have created dilemmas for plan fiduciaries as well as for the recipients of the overpayments. Fiduciaries have felt obligated to seek repayment of amounts going back many years where repayment might impose a severe hardship on the distributees or simply be impossible. In addition, the overpayments may have been rolled over into IRAs even though they were not eligible for rollover.
SECURE Act 2.0 would establish a comprehensive scheme for recouping inadvertent overpayments and solve the rollover problem. Among the changes would be:
· Limiting the overpayments that could be recovered to payments within 3 years of written notice to the participant.
· Limiting reductions in future payments to 10% of the amount otherwise owed in each payment and annual reductions to 10% of the overpayment.
· Providing that ERISA’s claims and appeals procedures allow distributees to contest the amount claimed to be owed to the plan.
· Providing that overpayments to participants could not be recovered from surviving spouses and beneficiaries.
· Providing that actions taken pursuant to the new rules, which could include decisions not to recoup overpayments, are not violations of fiduciary responsibility.
Conforming amendments would not be required until 2022, when SECURE Act and CARES Act amendments will also have to be made.
Is SECURE Act 2.0 Likely to Become Law?
SECURE Act 2.0 appears to have broad support and addresses known problems. A bill with some similar provisions was introduced by Senators Portman and Cardin earlier this year. However, the SECURE Act also had broad support and Congress still took a surprisingly long time to pass it. Although SECURE Act 2.0’s chances of passage appear decent, it is too soon to count on seeing SECURE Act 2.0 become law. However, even if SECURE Act 2.0 is not enacted, some of these provisions could be folded into other legislation, such as multiemployer pension plan reform or a new CARES Act. The pension community should keep its fingers crossed.