The Potential Impact of SECURE Act 2.0 on Small Business - Ottosen DiNolfo Hasenbalg & Castaldo, Ltd

by Michael Castaldo III

The U.S. House of Representatives passed the “Securing a Strong Retirement Act of 2021” (hereinafter “SECURE 2.0” or the “Bill”) on March 29, 2022 after an overwhelmingly bipartisan vote of 414-5. SECURE 2.0 is an effort by Congress to offset the retirement savings crisis in the United States and attempts to build on the initiatives already started to help a wide range of Americans achieve retirement security and financial wellbeing. In sum, the Bill is aimed at: (i) getting people to save more for retirement; (ii) improving retirement rules; and (iii) lowering the employer cost of setting up a retirement plan. The Bill is now pending before the Senate and is undergoing modifications. But given its obvious bipartisan support, it is anticipated the Bill will eventually pass both chambers. This Article overviews the impact SECURE 2.0 might have on small employers.

Auto Enrollment

If enacted, SECURE 2.0 would require employers that start retirement plans like 401(k)’s or 403(b)’s to automatically enroll employees when they are hired at a pre-tax contribution rate of at least 3%, although the employee will have the option to elect out or elect a different percentage. Under the current language of the Act, this 3% initial rate would then automatically increase by 1% every year up to 10% until the employee contributes a certain percentage, but in no case can it exceed 15%. This means that, while an employer is required to enroll employees, an employee can elect not to contribute at all. This automatic process is intended to help remove the initial hurdle to start saving. In theory, it would give employees a better foundation to build and develop their overall savings and retirement strategy. The good news for small (and new) businesses; however, is that the current Bill exempts businesses with ten or less employees, as well as business that have not been operating for at least three years, from these proposed automatic enrollment requirements.

Credits For Student Loan Payments

The student debt crisis generates plenty of discussion of its own. In this context, Congress identified that graduates can be deterred from saving for retirement due to the need to pay student loans. The Bill would allow employers to offer matching contributions to employees who are paying off student loans. In theory, this would reduce the need to choose between saving for retirement and paying off student loans. This could be key in helping many individuals jump start their retirement plan before it is too late to take full advantage of their youth.

Catch-Up Contributions

On the opposite side of the retirement spectrum, those that are already well into their career can also find some relief in the proposed Bill. If adopted as-is, SECURE 2.0 could help those who may have under-saved throughout their career by increasing 401(k) catch-up contributions to $10,000 for those aged 62-64. Intended to act as a last chance to save money while in the workforce, catch-up contributions are already designed specifically for people who are closer to retirement so they can save more at a time when they may have the means to do so. The current allowed maximum for catch-up contributions sits at $6,500 for those who are 50 or older, so this increase could make a significant difference for some individuals. The current version of the Bill includes a provision that would require all catch-up contributions be made to Roth arrangements with no tax deduction, but these savings eventually lead to potentially higher tax-free withdrawals and increased net income during retirement.

Annuities

SECURE 2.0 also modifies the rules concerning Qualified Longevity Annuity Contracts (“QLACs”). A QLAC is a type of deferred annuity funded with an investment from a qualified retirement plan or an individual retirement account (“IRA”). In essence, it provides guaranteed monthly payments until death and is shielded from downturns in the stock market. As long as the annuity complies with Internal Revenue Service requirements, it is exempt from the required minimum distribution (“RMD”) rules until payouts begin after the specified annuity starting date. The current maximum that can go into a QLAC is the lesser of $135,000 or 25% of the value of an individual’s retirement accounts. The proposed legislation currently removes the 25% cap.

Required Minimum Distributions

The Bill’s predecessor changed the age at which required minimum distributions from retirement accounts must begin from 70.5 to 72. Required minimum distributions would not have to start until age 73 beginning in 2022, age 74 in 2029, and 75 in 2032. The changes would become effective after December 31, 2021, for anyone who reaches age 72 after that date. Additionally, those who presently fail to take their full RMD face a 50% excise tax. SECURE 2.0 would reduce the excise tax to 25%, and even further down to 10% if the mistake is corrected quickly.

Conclusion

Through SECURE 2.0, Congress intends to address the retirement crisis in America. At present, the Bill has not yet passed the Senate, but it has good prospects. In fact, the Bill has broad bipartisan support and a number of legislators have made passage a priority. If this Bill were to become law, it would benefit small employers in a variety of ways. Regardless of the size of your business, if you have any questions on how SECURE 2.0 might impact your operations and finances, please do not hesitate to reach out to one of the attorneys at Ottosen DiNolfo Hasenbalg & Castaldo, Ltd.