The 8 Most Impactful Changes of the SECURE Act 2.0 for Your Employees
With the new SECURE Act 2.0 up for review in the Senate, now is the time for HR professionals to get proactive about setting employees up for a successful retirement in the new landscape of retirement planning.
Our team of Retirement specialists broke down the most notable features of the SECURE Act 2.0 to help you and your team prepare.
The original SECURE Act (Setting Every Community Up for Retirement Enhancement) was passed in 2019 and went into effect in 2020. Its intent was to help employers offer retirement plans that empower workers at all income levels to save for their futures. Now, two years later, further reforms may be signed into law in a matter of months or even weeks.
Here’s what you need to know about the SECURE Act 2.0 and how it will affect your employees:
Raising the age of the Required Minimum Distribution (RMD.)
The age at which an individual is required to start drawing money out of their pre-taxed retirement accounts is going up. The first SECURE Act raised the age from 71.5 to age 72, and the new version includes a plan that extends it to age 73 in 2023, then to age 74 in 2030, and finally to age 75 in 2033. This is overall a positive change because individuals are no longer forced to take money out as early. Of course, if they want to, then they can, but it is not required.
The penalty for missing the RMD is less severe.
While it is still significant, the SECURE Act 2.0 lowers the penalty for missing the RMD. In the scenario that an individual forgets to take money out from their retirement account, the penalty will be decreased. For example: In the past, if an individual was required to take out $10,000 from an IRA and forgot to do so, the penalty was 50%. So, that person would still have to take the $10,000 out, report it on their taxes, and then pay a $5000 penalty. The new SECURE Act 2.0 drops the penalty to 25%.
The SECURE Act 2.0 requires auto-enrollment to new employees. When a new hire starts at your company, they will automatically be enrolled in the firm’s retirement program at 3%. There is also an auto-increase feature, increasing the contribution each year by 1% until it reaches 10%. Of course, employees may opt to put in any amount they’d like, but this move ensures that the default for all employees is to contribute. While this is a great feature for many employees who would otherwise forget to enroll, this amount is often not enough for an individual to set up a successful retirement plan. There’s a chance this handy set-it-and-forget-it policy could leave some employees wondering why their nest egg isn’t what it needs to be.
Increased catch-up contributions.
Under the current law, an individual is allowed to contribute more toward their retirement once they turn 50. With the SECURE Act 2.0, this allowance is increased at ages 62, 63, and 64. All catch-up contributions will be considered Roth contributions, which means the individual will pay taxes on them upfront. This new rule is helpful in that it gives individuals the ability to save more in that final push to prepare for retirement.
Retirement Savers’ Contribution Credit.
We love this one. This credit is a dollar-for-dollar reduction that an individual does not need to pay back. It really is a tax credit just for saving up for retirement, which employees should be doing anyway. For those who are eligible, the credit is 50% per person – which means, if they are married, their spouse could likely take the same credit. That’s a win!
This adjustment to the SECURE Act is about – you guessed it – matching contributions to student loan payments. As an employer, you may already have a program where you already pay or match your employees’ student loan payments. It appears that this new feature would make it so that these matches can go straight into the employees’ 401(k). This could be a great asset to recruitment for those employees who are not able to make both a student loan payment and a 401(k) contribution.
More potential Roth contributions.
Currently, the employer match on retirement contributions goes into the traditional 401(k). However, in the SECURE Act 2.0, employer-matching contributions will be allowed to be made as Roth contributions. This is helpful for employees in low tax brackets saving up for Roth, as another way to get more dollars in their Roth 401(k), growing tax-free for their financial future.
Employers are now allowed to incentivize employees to participate in their retirement plan.
Finally, employers are now able to encourage employees to participate in their retirement program by providing incentives, such as small gift cards. Any token that reminds an employee to participate is a win for both the employee and the employer.
In summary, the SECURE Act 2.0 provides more options for retirees, but the new rules can be a little complex. We recommend preparing communications for employees ahead of time so they can start thinking about their new landscape of retirement planning.
This is a great time for HR Professionals to review their company retirement programs and make changes to successfully recruit and retire valued employees. For an assessment of your current plan, guidance on choosing a new plan, or questions regarding the SECURE Act 2.0 or other retirement-related questions, please reach out to our Retirement team.