Secure Act: Law Or Not?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on 20 December 2019. It revised existing rules around retirement savings, including raising the age of required minimum distributions and eliminating age limits for traditional IRA contributions.

A follow-up package, the SECURE 2.0 Act, was signed into law in December 2022. It introduced dozens of new retirement-related provisions, building on the original SECURE Act.

The SECURE Act was signed into law on 20 December 2019

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on 20 December 2019. The SECURE Act was designed to address the retirement crisis in the United States, making it easier for small business owners to set up "safe harbour" retirement plans that are less expensive and simpler to administer. The Act also made changes to rules around retirement savings, including raising the age of required minimum distributions (RMDs) and eliminating age limits for traditional IRA contributions.

The SECURE Act was passed with an overwhelming bipartisan majority of 414-5 in the House of Representatives, but faced opposition in the Senate, where it was held up by Republican senators. It was eventually passed as part of an end-of-year appropriations bill.

The SECURE Act made a number of changes to tax-advantaged retirement accounts. It increased the cap under which small businesses can automatically enrol workers in "safe harbour" retirement plans from 10% of wages to 15%. It also provided a maximum tax credit of $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrolment.

The Act enabled businesses to sign up part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service. It also encouraged plan sponsors to include annuities as an option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations.

The SECURE Act also pushed back the age at which retirement plan participants need to take RMDs, from 70½ to 72 (this was later raised to 73 in 2023). It allowed the use of tax-advantaged 529 accounts for qualified student loan repayments (up to $10,000 annually) and permitted penalty-free withdrawals of $5,000 from 401(k) accounts to defray the costs of having or adopting a child.

A follow-up package, the SECURE 2.0 Act, was signed into law in late 2022, introducing dozens of new retirement-related provisions.

It raises the age of required minimum distributions

The SECURE Act 2.0, signed into law in 2022, raises the age for required minimum distributions (RMDs) from retirement accounts. The previous age of 72 has been increased to 73 as of January 1, 2023, and will further increase to 75 from January 1, 2033. This change gives retirees more time to save and allows for a longer period of tax-deferred growth. However, delaying RMDs may result in larger withdrawal amounts in later years, potentially pushing individuals into a higher tax bracket.

The SECURE Act 2.0 also reduces the penalty for failing to take RMDs in a timely manner from 50% to 25%. Additionally, if the failure is corrected promptly, the penalty is further reduced to 10%. This change provides more flexibility for retirees and reduces the financial burden associated with missing the RMD deadline.

The increase in the RMD age is one of the key provisions of the SECURE Act 2.0, which aims to address the retirement savings gap and encourage more workers to save for retirement. By raising the RMD age, the Act allows individuals to keep saving for longer and provides them with greater control over their retirement funds. This change is particularly significant for retirees with lower incomes, who often rely on RMDs to cover their living expenses.

The SECURE Act 2.0 also introduces other changes related to RMDs, such as the elimination of RMDs for qualified employer Roth 401(k) plan accounts starting in 2024. Additionally, individuals can now delay their first RMD until April 1 of the year following the year they turn 73, with subsequent RMDs required by December 31 of each year. These changes provide retirees with more flexibility and help them optimize their distribution strategies.

It eliminates age limits for traditional IRA contributions

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 revised existing rules around retirement savings, including the elimination of age limits for traditional IRA contributions.

Prior to the SECURE Act, individuals needed to be under the age of 70½ to contribute to a traditional IRA. However, the Act repealed this age restriction, allowing individuals with earned income to make contributions at any age. This means that even those who are already taking required minimum distributions can still contribute to a traditional IRA.

The only requirement for contributing to a traditional IRA is that the individual has eligible compensation, which generally refers to earned income such as wages, salaries, tips, professional fees, bonuses, and other income-generating streams received from working. It also includes commissions, self-employment income, nontaxable combat pay, and military differential pay. For tax filing purposes, individuals with little or no eligible compensation can make contributions to their own IRAs based on their spouse's income, provided they file jointly and meet certain other conditions.

The SECURE Act's removal of the age limit for traditional IRA contributions provides greater flexibility for individuals who wish to continue saving for retirement, even after reaching the age of 70½. This change, along with other provisions in the Act, aims to address the retirement income gap and empower individuals to reach their savings goals.

It mandates auto-enrolment for new plans starting in 2025

The SECURE Act 2.0, signed into law on December 29, 2022, mandates auto-enrolment for new plans starting in 2025. This means that any plan set up with an effective date after December 29, 2022, must add auto-enrolment no later than January 1, 2025. While plans can delay adding auto-enrolment for now, they will be required to amend their plans by the deadline.

The auto-enrolment provision is designed to simplify participation and increase retirement savings rates among employees. Eligible employees will be automatically enrolled at a preset contribution rate, which must be between 3% and 10% of their salary each paycheck, unless they elect a different rate. Employees who do not wish to participate can opt out of the plan.

Businesses with fewer than 10 employees, new businesses that have operated for less than three years, churches, and government plans are exempt from the auto-enrolment mandate.

The SECURE Act 2.0 also includes notification requirements for employers. They must provide employees with details about the plan, such as contribution rates, opt-out instructions, and investment options.

The Act's auto-enrolment provision is expected to boost participation rates and help employees improve their financial futures. It is seen as a significant change that will encourage more people to save for retirement.

It allows employers to match contributions for employees repaying student loans

The SECURE Act 2.0, signed into law in December 2022, introduces a provision that allows employers to match contributions to their employees' retirement plans based on student loan payments. This means that employers can now use an employee's qualifying student loan payment to match contributions to their 401(k), 403(b), or SIMPLE IRA retirement plan.

This provision, outlined in Section 110 of the SECURE Act 2.0, offers a way for employees to receive matching contributions to their retirement plans even if they are not making retirement plan contributions themselves. Instead, their monthly student loan payments can count towards the employer's matching contribution.

For example, if an employer matches up to 3% of an employee's retirement plan contributions, the employee can choose to forgo their retirement plan contribution and have their monthly student loan payments count towards the employer's match instead. In this case, the employee's minimum monthly student loan payment needs to be high enough to reach the full employer match.

It's important to note that this provision does not replace the importance of contributing to a retirement plan. Retirement savings accounts offer tax advantages and compound, tax-free growth over time, which is not the case with student loan payments. Therefore, it is recommended that individuals contribute to both their retirement plans and student loan payments if possible.

The SECURE Act 2.0 provision for student loan payments and retirement contributions can be beneficial in certain scenarios, such as when an individual needs to tighten their budget and cut back on retirement plan contributions. In such cases, receiving a partial match from the employer based on student loan payments is better than nothing.

Additionally, this provision can be useful for younger workers burdened with college loans. It provides employers with an incentive to attract and retain employees by helping them kick-start their retirement savings while also paying off their student loans.

Overall, while the SECURE Act 2.0 provision for matching contributions based on student loan payments offers some benefits, it should be carefully evaluated in the context of an individual's financial situation and long-term retirement goals.

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