In 2019, the SECURE (Setting Every Community Up for Retirement Enhancement) Act was passed as a way to expand and preserve retirement savings for individuals who otherwise have a lack of savings opportunities.
Now the SECURE Act 2.0, which builds on the original act’s efforts to encourage and promote retirement savings, is pending passage by Congress. If you’re a high net worth individual, then we’re betting you’re already on your way to strong financial preparation for retirement and the underlying purposes of these acts may not feel entirely pertinent.
However, if the bill passes, it will have an impact on your retirement accounts and how you treat your finances both as you approach retirement and in retirement. And if you happen to be a small business owner, then you should be well-versed in this legislation.
Here’s what you need to know about some of the key provisions and how they may affect you.
Required Minimum Distributions:
- The age for required minimum distributions (RMDs) would change, increasing from age 72 to 75.
- The excise (or penalty) tax for missing a RMD would also decrease from 50% to 25%.
- If individuals have balances that are less than $100,000, they would not have to take RMDs.
- The amount of savings that would be exempt from RMDs would increase to $200,000 (from $135,000) if the funds were to be used to purchase a Qualified Longevity Annuity Contract (QLAC).
- For those aged 60 and older, the catch-up contribution would increase to $10,000.
- For those aged 50 to 59, the catch-up contribution would remain the same as the 2021 limit of $6,500.
- If you have a SIMPLE IRA, the catch-up contribution is $5,000 for those 60 and older.
Qualified Charitable Distributions:
- The Qualified Charitable Distribution (QCD) amount would increase to $130,000 and allow QCDs to be distributed from other qualified retirement plans (including 401ks and 403(b)s) in addition to IRAs.
For Small Businesses
Plan administration and enrollment:
- Automatic enrollment with a starting rate of at least 3% of an employee’s pay would be mandated, so smaller businesses with 401k and 403(b) plans would need to ensure this is set up. (Employees would be allowed to opt out.)
- Exceptions to the automatic enrollment rule would include businesses with 10 or fewer employees and new businesses (less than three years old).
- Employee contribution increases of 1% annually, until a 10% cap is reached, would also be automated.
- Overall, plan administration would be simplified by the SECURE Act 2.0, including through the easing of certain disclosure requirements, modifications to requirements for recovering plan overpayments mistakenly made to retirees, and expansion of the Employee Plans Compliance Resolution System (EPCRS).
Pooled Employer Plans (PEP):
- The original SECURE Act created this avenue for employers in unrelated businesses to pool together and create a single plan. The new bill would allow 403(b) versions of PEPs.
- In addition to matching contributions, employers would be able to offer additional financial incentives for employees, in the form of de minimis incentives, such as gift cards in small amounts.
- Employers would be able to make matching contributions to 401ks, 403(b)s, 457(b)s, and SIMPLE IRAs on behalf of employees who are paying off student loans in lieu of contributing to a plan out of their salary.
- Employers would be required to allow part-time workers who have worked for three consecutive years (and logging a minimum of 500 hours each year) to defer into the company’s 401k plan.
- The tax credit for start-up businesses would be increased to 100% of administrative costs in the first and second years of business; 75% in the third year; 50% in the year four; and 25% in year five.
- This credit would be extended to businesses with up to 100 employees.
- Employees of businesses with up to 50 employees would also receive a tax credit of $1,000 in the first two years of a defined contribution plan, $750 in the third year, $500 in the fourth, and $250 in year five.
Do you have questions about the SECURE Act 2.0? Whether you are an individual wanting to make sure you’re on the right track for managing your wealth in preparation for retirement, or you are a small business owner who needs a financial pro on your side, contact us to learn more about how Ironwood Wealth Management can help.