There is significant legislation working its way through the House that promises to offer new design opportunities to retirement plan sponsors, while improving plan participants' opportunities to save for retirement. Congress' continued bi-partisan efforts to reform the regulation of private retirement plans has been fruitful, resulting most recently in proposed legislation, "Securing a Strong Retirement Act of 2021", aka SECURE 2.0. The bill passed out of the House Ways and Means Committee with unanimous approval on May 5, 2021 and now goes to the House for approval. It is expected that in 2021 or 2022 the bill will become law.
Here is an overview of the major provisions of SECURE 2.0:
- Matching Contributions for Student Loan Payments
- Employers will be able to add a feature to the 401(k) plan whereby a participant's "qualified student loan payment" would be treated as an elective deferral, eligible for an employer matching contribution. For example, for a plan that matching elective deferrals 100% on the first 3% of deferrals, a student loan payment that is at least 3% of the participant's annual compensation would result in a commensurate employer matching contribution to the 401(k) plan of 3% of compensation. The new feature would be available starting with the 2022 Plan Year.
- For purposes of ADP testing, the bill would allow a plan to test the contributions of the population of employees who make student loan payments separately from the contributions of the population of employees who make 401(k) contributions to the plan.
- Expanding Coverage and Increasing Retirement Savings:
- Catch-Up Contribution Limits increases to $10,000 for individuals between the ages of 62 and 64. (Higher limit not available for individuals age 65 and older.)
- Required Automatic Enrollment - 401(k) plans established after the passage of the bill would be required to automatically enroll all employees for deferrals at 3%, with a 90-day opt-out window.
- Minimum Required Distribution Age increased incrementally to age 75 for individuals who attain age 74 after 12/31/2031.
- Mandatory cash-out limit raised from $5,000 to $6,000, with the requirement that if, within 6 months, a participant does not make a distribution election or accept direct payment, the plan administrator must transfer the benefit to the Office of Retirement Savings Lost and Found. The Office would then periodically search for non-responsive participants.
- Long-Term, Part-Time employees must be eligible to make elective deferrals to a plan after 2, rather than 3, consecutive years of being credited with at least 500 hours of service. Importantly, the bill clarifies that service performed before 2021 is disregarded for vesting purposes for this group of newly eligible employees.
- Simplifications and Clarifications to Existing Plan Rules:
- Office of Retirement Savings Lost and Found - The bill requires the establishment of an online searchable database, to be managed by the PBGC, within 3 years of the passage of the bill, to be known as the "Retirement Savings Lost and Found". Further, the bill directs the Secretary of Labor, in consultation with the Secretary of Treasury, to issue a Final Rule within 3 years of passage of the bill on what steps plan fiduciaries must take to locate missing participants, and what practices and procedures they must implement to maintain up-to-date contact information on deferred vested participants, to satisfy their fiduciary duties.
- Repayment of Qualified Birth and Adoption Distributions - If a participant wishes to repay to his or her account a withdrawal made under the Qualified Birth and Adoption Distributions, the repayment must be made within 3 years of taking the withdrawal.
- Self-Certification for Deemed Hardship - Plan administrators of 401(k) and 403(b) plans may rely on an employee's certification that a distribution is on account of a financial hardship of a type that is deemed in the Treasury regulations to be an immediate and heavy need.
- Penalty Free Withdrawals in the Event of Domestic Abuse - The bill would allow a penalty- free withdrawal of the lesser of $10,000 or 50% of a participant's vested benefit of the plan for a participant who self-certifies he or she is the victim of domestic abuse.
- 457(b) Plan Election Changes - Participants would be allowed to change their deferral election any time prior to the date that compensation being deferred is available. Currently, changes to elections under a 457(b) plan must be made prior to the beginning of the month to which deferrals are made.
We will be tracking this legislation and provide updates on how these and other provisions in the bill change over the coming months.
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