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What is Secure Act 2.0?

May 26, 2022
Empower Insights

Understanding the proposed retirement legislation

Did Congress save room for seconds?

We’ll find out soon enough.

In March, the House of Representatives voted overwhelmingly in support of the Securing a Strong Retirement Act of 2022. The proposed retirement bill, which is known as SECURE Act 2.0 for short, now awaits approval from the Senate and then a signature from president Joe Biden.

The policy builds on the original SECURE Act — the Setting Every Community Up for Retirement Enhancement Act — from 2019. If passed, the bipartisan legislation could help more individuals better prepare for their future amid today’s uncertain economic landscape.1

Read on to learn more about SECURE Act 2.0 and how it could impact you, your money and your financial confidence.

What is SECURE Act 2.0?

As currently constructed, SECURE Act 2.0 is aimed at enhancing the retirement savings experience for working Americans. Some of its key elements focus on incentivizing people to save more and prioritize their long-term goals.

Quote from CEO Ed Murphy. This legislation could help get more working Americans back to feeling financially healthy and better prepared.

When is SECURE Act 2.0 being voted on?

The exact timeline isn’t known, but some political experts believe the Senate will act on the bill later this year.2 It’s important to note that if and when it’s passed, the Senate’s version could look much different from the one approved by the House. Changes and modifications to many of the provisions are almost certain.

What’s in SECURE Act 2.0?

A lot!

With so much to unpack, we’ll keep everything high level and highlight some of the bill’s most critical features.

EXPANSION TO AUTOMATIC ENROLLMENT

This is the big one.

SECURE Act 2.0 would require employers that establish a 401(k) or 403(b) program to automatically enroll all new employees. They would be enrolled at a minimum 3% contribution rate, which would increase annually until 10%. Employers could elect a higher percentage, but it wouldn’t be able to exceed 10%. Workers, on the other hand, would have the option to opt out or choose a deferral rate that fits their needs.

It's also important to note the automatic enrollment provision would only apply to plans adopted after the enactment date; existing plans would be grandfathered in and would not have to offer automatic enrollment.

New businesses (three years or younger) and small employers (10 or fewer staff members) would be exempt.

We know automatic enrollment works, Murphy said. These features have had a significant impact on improving retirement savings since they were first included in the Pension Protection Act of 2006.

CHANCE TO PLAY MORE CATCH UP

Right now, in 2022, people 50 or older can contribute an additional $6,500 above the IRS limit — called catch-up contributions — to their retirement savings account. Catch-up contributions are designed to help people make up ground, or save more, as they’re nearing retirement.

Under SECURE Act 2.0 you’ll have more room to play catch up. People ages 62, 63 or 64 would be eligible to sock away $10,000 in catch-up contributions to their 401(k) or 403(b) accounts (indexed to inflation). While catch-up limits would revert back to normal levels once a person turns 65, those three years would provide an extra opportunity to pad their nest egg.3

RAISING THE REQUIRED MINIMUM DISTRIBUTION AGE

Just as its name implies, a required minimum distribution (RMD), is the minimum amount of money you must withdraw from your tax-advantaged retirement accounts each year, and that amount is based on life expectancy. RMDs were put into place to ensure the IRS receives its piece of the pie; in other words, it’s the government's way to eventually collect income taxes on your funds.5

The SECURE Act raised the RMD starting age to 72. But SECURE Act 2.0 goes a few steps further. Workers would have to begin making withdrawals from their retirement account at age 73 in 2023, 74 in 2030 and 75 in 2033.4 This means your money may have more time to grow than if you were required to begin taking distributions at age 72.

In addition, if you miss an RMD, SECURE Act 2.0 would also reduce the tax (from 50% to 25%) for failure to take an RMD.

HELP WITH STUDENT LOANS

Many borrowers choose paying back their debt over saving for retirement. Under SECURE Act 2.0 they won’t have to make a choice. Under this provision, companies would be allowed to match student loan payments up to a certain percentage and deposit their matching contribution into the employee’s retirement account.6

This arrangement could greatly influence people early in their careers as they juggle paying off student loans, managing basic living expenses, and saving for the future.   

A woman sitting at desk using calculator

IMPROVEMENTS TO SAVER’S CREDIT

The saver’s credit is a tax credit for middle- to low-income earners who are contributing to their retirement accounts. (As it currently stands, it’s worth up to $1,000 for single filers and $2,000 for married couples filing jointly.) Created in the early 2000s, the saver’s credit provides people with a greater incentive to build their nest egg, and because it’s a credit, it also reduces the amount of taxes you may owe.9

SECURE Act 2.0 would raise the amount of the credit to a flat 50% for joint filers with an Adjusted Gross Income, (AGI), up to $48,000 ($24,000 for single filers), and the credit would be phased out on a pro-rata basis over the next $35,000 of AGI ($17,500 for single filers). At $83,000 ($41,500 for single filers) of AGI, it would be eliminated.7,8

BENEFITS FOR SMALL BUSINESSES

Small businesses could benefit in big ways. Among the many potential incentives in SECURE Act 2.0, the bill would encourage smaller companies to sponsor a workplace retirement savings plan by giving tax credits to offset any administrative expenses. An additional tax credit (which would be capped at $1,000 annually) would be available for defined contribution plans that provide employer contributions.10

“What a great gift of security this legislation could give American workers,” Murphy said.  “With this legislation, we would be saying that retirement planning and saving is for all workers, including those who work for small businesses.” 

ADVANTAGES FOR PART-TIME EMPLOYEES

Part-time work could mean full-time treatment. Under SECURE Act 2.0, employers would have to give certain part-time workers the opportunity to enroll in and save in their 401(k) plan once they meet certain requirements. In order to be eligible, part-time employees would be required to hold their job for two consecutive years, a change from the current three-year rule, and clock in for at least 500 hours each year.11

FINAL THOUGHTS

SECURE Act 2.0 is designed to further promote retirement security. By helping American workers better prepare for their financial future, this legislation could improve the financial confidence of many – especially during times of rising inflation and market volatility.

Of course, this is a comprehensive bill and entails much more than what is listed and described above. For a more analysis on SECURE Act 2.0, visit www.congress.gov.

1 CNBC, “House passes ‘Secure Act 2.0.’ Here’s what that means for retirement savings,” March 2022.

2 401K Specialist, “Reconciling SECURE 2.0: Similarities and Differences Between House and Senate Bill,” April 2022.

3 Forbes Advisor, “Could SECURE Act 2.0 Fix The Retirement Crisis?,” March 2022.

4 Yahoo! Finance, “SECURE Act 2.0 Passes House, Signaling Massive Retirement Savings and Investment Policy Shift,” April 2022.

5 The Motely Fool, “401(k) Minimum Distributions: What You Need to Know,” November 2021.

6 Forbes Advisor, “Could SECURE Act 2.0 Fix The Retirement Crisis?,” March 2022.

7 Reuters, “House Passes SECURE 2.0: Summary of Key Tax Provisions,” March 2022.

8 Nerd Wallet, Saver’s Credit: What It Is and How It Works,” January 2022.

9 Smart Asset, “The Saver’s Credit: 2022 Rules and Income Limits,” December 2021.

10 CNN, “Big changes are coming to your 401(k). Here's what you need to know,” April 2022.

11 Paychex, “SECURE Act 2.0: Details on Retirement Bill Passed by the U.S. House of Representatives,” April 2022.

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