A couple of days after the Oscars, get ready for another sequel, this time in Congress -- SECURE 2.0, officially known as the Securing Strong Retirement Act of 2022.
The SECURE II act passed the House Ways and Means Committee last May in a bipartisan vote to build on retirement reforms, but it did not get momentum. The bill also was not loaded onto the recent $1.5 trillion omnibus bill, as many proponents hoped. The bill will get another chance on Tuesday afternoon when it is scheduled for a floor vote. It has been reported that some congressional members retiring this year would like to pass this legislation as a legacy.
The bill features provisions to loosen restriction on annuities in retirement plans in a section called Preservation of Income. It would change required minimum distribution rules to allow annuity options and also raise the limits on Qualified Longevity Annuity Contracts (QLACs).
The bill also:
• Raises the age to start required minimum distributions. Plan participants are required to begin taking distributions from their retirement plans at 72. The bill would raise it to 73 this year and increase it to 74 on Jan. 1, 2029, and 75 in 2032.
• Expands automatic enrollment in retirement plans in employer-sponsored retirement plans, while reducing the service requirements for part-time employees to participate in an employer plan. It requires 401(k) and 403(b) plans to automatically enroll participants, with an employee opt-out. The initial automatic enrollment amount is at least 3% but no more than 10%, but the amount would be increased by a percentage point each year until the total reaches 10%. It also allows employers to treat student loan payments made by their employees as elective deferrals for purposes of determining retirement plan matching contributions.
• Increases the catch-up contribution level to retirement accounts for people nearing retirement. Under current law, the limit on IRA contributions is increased by $1,000 for individuals who have reached age 50, but the bill would index such limits starting in 2023. It would also increase the limits on catch-up contributions for employees. The limit on catch-up contributions for 2021 is $6,500, except in the case of SIMPLE plans, for which the limit is $3,000. The bill would increase these limits to $10,000 and $5,000 to apply at age 62, 63 and 64.
• Reduces administrative burdens for plan sponsors by modifying retirement plan design rules and changes regulations on pooled employer plans and multiple employer 403(b) plans. Small businesses with 10 or fewer employees, new businesses (those that have been operating for less than three years), church plans and governmental plans are excluded from automatic opt-in requirements.
• Expands “Rothification” by requiring a section 401(a) qualified plan, section 403(b) plan, or governmental section 457(b) plan that permits an eligible participant to make catch-up contributions to treat those contributions as after-tax Roth contributions, according to a Deloitte report. The bill would also allow plan participants to designate employer matching contributions as Roth contributions, and permit SEPs and SIMPLE IRAs to be designated as Roth IRAs.
Insurance industry advocates such as the Insured Retirement Institute have been pushing for the changes since the SECURE Act in 2019. The bill was one of the key issues during IRI’s virtual legislative fly-in earlier this month.
In supporting retirement reforms, the American Council of Life Insurers last year said more than 15 million annuity-based IRAs are held by individuals.
“As service and product providers, as well as employer plan sponsors, life insurers believe that adequately and consistently saving for retirement, effectively managing assets throughout retirement and utilizing appropriate financial protection products are all critical to Americans’ retirement and financial security,” according to ACLI’s statement after SECURE 2.0 was passed by the Ways and Means Committee.
The statement pointed out that in 2019, almost 50 percent of all households had less than $5,300 in liquid savings that can be used for an emergency, along with other statistics showing that younger Americans and those of color suffer significant financial inequality.
“SECURE 2.0 offers tax credits to small businesses to help set up new retirement plans, and to encourage bosses to give workers a matching contribution. But the latter credit is paltry, maxing out at $1,000 per employee per year, depending on how much the worker contributes,” according to the article. “That’s the same maximum amount that low-income workers can claim under the federal Savers Credit, which another SECURE 2.0 provision promises to promote more effectively.”
The writer goes on to say that the Saver’s Credit does not need more marketing – it’s just inadequate. To claim the full $1,000, a single worker with taxable income not exceeding $20,500 must contribute $2,000 annually — at least 10 percent of their earnings.
The bill protects high-level earners that don’t need more protection, according to the article: “Federal tax breaks for private plans (as opposed to Social Security) now cost the US government almost $380 billion per year — a staggering sum, and those subsidies skew heavily in favor of the wealthiest, including tens of thousands of Americans who have millions of dollars saved and require no further help.”
Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected]