What Is SECURE 2.0?
SECURE 2.0—so-called because it builds on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019—is pending legislation designed to substantially improve retirement savings accounts, including 401(k)s and 403(b)s, in the U.S.
Currently, the House and Senate each have their version of SECURE 2.0. The House version (H.R. 2954) was passed by that body on March 29, 2022, with tremendous (414-5) bipartisan support. The Senate version (S. 1770) was introduced in the Senate on May 20, 2021, and remains in the Senate Finance Committee.
- SECURE 2.0 is pending legislation that is built on and expands the SECURE Act of 2019 to improve retirement savings accounts.
- The House version of SECURE 2.0 passed that chamber on March 29, 2022, but the Senate version remains in committee.
- Although many parts of both bills are similar, differences remain that must be worked out.
- The legislation in both chambers enjoys broad bipartisan support, and it is widely believed SECURE 2.0 will become law in 2022.
Understanding the SECURE Act 2.0
SECURE 2.0 is something both chambers of Congress want to see become law. Bipartisan support is woven into both versions of the bill. The 103 sponsors of H.R. 2954 consist of 55 Democrats and 48 Republicans. On the Senate side, six Republicans and five Democrats are cosponsors of S. 1770. SECURE 2.0 tries to accomplish three goals: Get people to save more for retirement, improve retirement rules, and lower the employer cost of setting up a retirement plan.
One of the most popular provisions of both bills is allowing employers to offer matching retirement contributions to employees paying off student loans. Under the proposed rules, employees would earn employer matching contributions by making student loan payments instead of contributions to the company’s 401(k).
Other identical or nearly identical provisions include:
- A searchable national lost–and–found registry for missing retirement funds
- Indexing individual retirement account (IRA) catch-up contributions in the same way regular IRA contributions are indexed
- A provision to allow small financial incentives for contributing to a 401(k) or 403(b) plan
- A provision permitting annuities to provide certain payments, such as lump-sum payments and annual payment increases of less than 5% annually
- A reduction in the penalty for failure to withdraw required minimum distributions (RMDs) from 50% to 25%
Reconciling both bills into one piece of legislation will not come without negotiating pain. Although many parts of both the House and Senate versions of SECURE 2.0 are nearly identical, the lack of an auto-enrollment mandate in the Senate version and minor differences concerning effective dates and other details will have to be worked out before a final bill emerges.
Prospects for passage in 2022, however, are high. Among the many advocates in both parties two legislators—Sen. Rob Portman (R; Ohio) and Rep. Kevin Brady (R; Texas)—have prioritized passage. They have pledged to see it through before both retire at the end of this year.
H.R. 2954 vs. S. 1770
Among the differences between the two versions of SECURE 2.0, several may present significant hurdles, depending on just how sincere the bipartisan spirit remains during negotiations. These haven’t begun because the Senate version hasn’t been passed within that chamber. Provisions that might take time to resolve include the following:
Auto-enrollment in 401(k)s
The House bill requires employers that start a new 401(k) plan to automatically enroll employees at a contribution rate of at least 3% and then increase it each year until the worker contributes 10%. Exclusions apply, including for companies with 10 or fewer employees or that have been in business for fewer than three years.
Existing 401(k) plans are not required to auto-enroll employees—just new plans.
The Senate version does not require auto-enrollment. It does include incentives to encourage companies to implement auto-enrollment.
The House bill expands the 401(k) catch-up provision for individuals 62, 63, or 64 from the current $6,500 to $10,000 beginning in 2024. SIMPLE plan enrollees would be allowed $5,000 in catch-up contributions versus the current $3,000. All catch-up contributions would have to be made as Roth (after-tax) contributions starting in 2023. Finally, a provision in the House bill would allow employer contributions to be post-tax (Roth) contributions if the employee opts for that.
The Senate bill’s $10,000 401(k) catch-up provision would apply to people 60 or older effective for years beginning after Dec. 31, 2021, and does not phase out at age 65. The rest of this section in the Senate bill mirrors the House bill.
Required minimum distributions (RMDs)
The 2019 SECURE Act changed the age at which required minimum distributions, or RMDs, from retirement accounts must begin from 70½ to 72.
Under the House-passed bill, RMDs wouldn’t 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.
The Senate proposal increases the RMD age to 75, beginning in 2032. Current age requirements would remain in place until then. It would also waive RMDs for individuals with less than $100,000 total in retirement savings accounts and reduce the penalty for failing to take RMDs to 25% from the current 50%, effective after December 31, 2021.
One option to provide an income stream later in life is a qualified longevity annuity contract or QLAC. Once you purchase the annuity, you decide when you want the income to start. The current maximum that can go into a QLAC is either $135,000 or 25% of the value of your retirement accounts, whichever is less.
Both bills would remove the 25% cap. However, the Senate legislation would increase the maximum amount allowed in a QLAC to $200,000, adjusted for inflation in future years. The House version maximum would remain at $135,000.
Will the SECURE Act 2.0 Become Law?
Almost certainly, and probably in 2022. SECURE Act 2.0 legislation has broad bipartisan support and a number of legislators have made passage a priority. The House passed its version of SECURE 2.0 on March 29, 2022. The Senate bill is moving more slowly and remains in committee. However, many parts of the Senate version mirror—or nearly mirror—the House version.
What Does the Congressional Budget Office (CBO) Have to Say About SECURE 2.0?
The House version has been evaluated by the CBO which says:
“H.R. 2954 would amend the tax code to modify rules for retirement plans and tax-favored savings accounts. Several provisions would reduce revenues significantly by expanding automatic enrollment in retirement plans and raising the age at which required minimum distributions (RMDs) from defined contribution retirement plans or traditional individual retirement arrangements (IRAs) must begin. Other provisions would increase revenues by directing some retirement plans to require catch-up contributions to be designated as Roth contributions and allowing some plans to permit employees to designate their employers’ matching contributions as Roth contributions.”
Overall, according to agency estimates, H.R. 2954 would raise revenues by $158 million over the 2021-2031 decade. The Senate version has not been finalized and passed, and therefore has not been evaluated by the CBO.
What Does SECURE 2.0 Have To Do With Social Security?
Almost nothing. One of the negatives about SECURE Act 2.0 is the fact it does nothing to solve the problem of the Social Security Trust Fund running out of money in just over a decade.
The Bottom Line
While cooperation between Republicans and Democrats in Congress remains at an all-time low, SECURE 2.0 figures to be one of the few pieces of legislation where both sides can find common ground.
Barring unforeseen circumstances, this legislation—designed to improve the retirement lives of millions of Americans—will likely become law sometime in 2022. While an Achilles heel of both bills is a failure to address Social Security shortfalls, any improvement in the percentage of Americans with any retirement savings plan will be welcome.