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SECURE Act 2.0: Expanding Retirement Savings to More Americans

Note: The below considers the broad impact of the SECURE Act on eligibility; further changes may come sooner with the recent congressional activity around SECURE Act 2.0.

On March 29, 2022, the United States House of Representatives overwhelmingly passed the Securing a Strong Retirement Act of 2022, referred to colloquially as the SECURE Act 2.0. The bill passed in bipartisan fashion following a 414-5 vote.

With the bill comes a number of changes to America’s retirement landscape if passed by the Senate and signed by the President, which is expected to occur.

This second iteration of the SECURE Act could bring change on a potentially massive scale. Aaron Schumm, CEO and Founder of Vestwell, put the scope of this legislation into perspective. “The news of the House passing SECURE 2.0 is a monumental step forward in closing the savings gap in the United States. The new mandates in this bill will accelerate savings opportunities for 32 million small businesses and 100 million undersaved individuals across the country.”

In this article, we’ll discuss some of the changes made by the bill and review the opportunity that lies before the retirement industry as a result of its passage.

What Is the Securing a Strong Retirement Act of 2022 (SECURE Act 2.0)?

The Securing a Strong Retirement Act of 2022 builds upon the SECURE Act passed by Congress in 2019. The provisions in this bill that most directly impact the retirement industry are as follows:

#1: Mandated Auto-Enrollment and Contribution Increases for 401(k) and 403(b) Plans

This legislation would require that newly-started defined contribution plans automatically enroll employees once they become eligible to participate in the plan. These employees would start their enrollment with a 3% pretax contribution that gradually increases by 1% each year, up to at least 10% but not more than 15% of the employee's pay. Currently plans already in existence are grandfathered in and so do not have to meet these requirements, but there are also exceptions for small businesses with 10 or fewer employees, those in business for less than three years, church plans, and governmental plans.

#2: Significantly Increase the Tax Credits Available to Employers Who Start a New Plan

The SECURE Act 2.0 would introduce a tax credit for defined contribution plans equal to the amount contributed by the employer on behalf of employees, up to $1,000 per employee. The full credit would be available to employers with 50 or fewer employees, but would be phased out for employers with between 51 and 100 employees. This represents a significant increase in tax credits that make starting a retirement plan more affordable now than ever, and could spur a sea change in the number of small businesses offering retirement plans.

#3: Authorize Employer Matching of Qualified Student Loan Payments

Many young people have trouble saving a nest egg for retirement while also making their student loan payments. As a result, some employees do not make any retirement contributions that their employer would match, leaving thousands of dollars on the table each year. Under the SECURE Act 2.0, employers would be allowed to match student loan payments as contributions to retirement for employees with student loans, allowing strained employees to pay off their loans while saving at the same time.

#4: Further Raise the Age Threshold for Required Minimum Distributions

The original SECURE Act raised the age at which participants are required to take distributions from their retirement account to 72 years old, up from 70 years and six months. This new legislation would raise it once more to age 73 in 2022, 74 in 2029, and 75 by 2034. This change gives savers greater flexibility when deciding the best time for them to begin withdrawals from their account.

#5: Allow Matching Contributions to Roth Accounts

Right now, employer matching contributions can only be paid into employees' pretax 401(k) accounts. If this bill passes in its current form, businesses could offer their employees the option to elect that some or all of their matching contributions be treated as Roth contributions for 401(k) plans. These Roth contributions would not be excludable from employees' gross income.

#6: Expand and Modify Allowable Catch-Up Contributions

Currently, anyone age 50 or over is eligible to make an additional catch-up contribution of $6,500, on top of the traditional $19,500 limit on 401(k) plan contributions. This legislation would raise the annual catch-up amount to $10,000 for participants ages 62 to 64, beginning in 2023. This higher limit would also be indexed for inflation. Additionally, the bill declares that all catch-up contributions to qualified retirement plans would be subject to Roth tax treatment, meaning those dollars would be taxed sooner.

How Will the SECURE Act 2.0 Change the Retirement Industry?

Of the 32 million small businesses in the United States, fewer than 3% offer a workplace savings solution. With the massive changes offered by the SECURE Act 2.0, and the $1,000 per employee tax credit in particular, the retirement industry could be on the precipice of a one-in-a-life renaissance.

According to Aaron Schumm, Founder and CEO of Vestwell, advisors are well positioned to take advantage of this legislation. “SECURE 2.0 creates a great opportunity for advisors who want to accelerate the growth of their retirement business. The small plan market is rapidly growing, projected to grow by 111% by 2025. Now, with SECURE 2.0, advisors have an increased opportunity to attract new small businesses clients as well as help their existing clients understand the incentives and expand coverage of previously excluded employees.”

Beyond this, small businesses also have an opportunity to capitalize on this transformation in retirement accessibility. The Securing a Strong Retirement Act will make it even more affordable for employers to invest in a retirement plan that helps them recruit and retain top talent, improving the unique competitive advantage that small businesses can bring to bear in the market.

Vestwell CEO Aaron Schumm also highlighted the way in which the SECURE Act 2.0 can help America move toward a more inclusive savings culture. “The passing of SECURE 2.0 in the House shows a great opportunity for inclusive savings in the United States. The law increases access to retirement savings for millions of Americans across the country including military spouses, part-time workers, non-profits employees, and late savers.”