Legislation passed by the House of Representatives would increase retirement benefits | Roetzel & Andress


The House of Representatives recently passed the Securing a Strong Retirement Act of 2022 (HR 2954), also known as “Secure Act 2.0,” which would expand and encourage retirement savings by an overwhelming vote of 414 against. 5. The Senate is expected to consider a similar version of this legislation later in 2022. In light of the overwhelming bipartisan support Secure Act 2.0 has received in the House, bipartisan support in the Senate is also expected. If enacted, the effective date of the legislation is expected to be in 2023 or later. We are monitoring the status of legislation in Congress and will post further updates.

Secure Act 2.0 continues the expansion of retirement benefits begun by the Secure Act, which was signed into law in 2019. The Secure Act made multi-employer plans available to more employers; increased tax credits for small employers who implement a plan; expanded plan coverage for part-time employees; allowed in-service distributions from defined benefit plans at age 59½; and raised the age at which distributions from a plan must begin.

Secure Act 2.0 would provide the following:

1. Increase the age at which required minimum distributions (“RMDs”) must begin. The Secure Act increased the age at which RMDs must begin from 70½ to 72 years. Secure Act 2.0 provides for an increase in the age at which RMDs must begin to 75 as follows:

Additionally, Secure Act 2.0 would reduce the penalty imposed on plan participants for failing to take an RMD from 50% to 25%. If the lack of distribution of the RMD is quickly corrected, the tax penalty is further reduced to 10%.

2. Expansion of automatic enrollmentst. Currently, 401(k) plans are permitted, but not required, to have automatic enrollment whereby employees have a percentage of compensation withheld and contributed to the employer’s 401(k) plan. The employee has the option of opting out of the auto-enrollment arrangement and receiving a refund of the amounts withheld.

Secure Act 2.0 would require employers to provide automatic enrollment in their 401(k) plans. There would be exceptions for existing 401(k) plans, new businesses that have been in existence for less than 3 years, and small businesses with no more than 10 employees.

Failure to automatically enroll an employee could be corrected by contributing to the plan within 9.5 months of the end of the plan year in which the error occurred.

3. Increased catch-up contributions. Under current law, a participant who has reached age 50 can make a $6,500 catch-up contribution to a 401(k) plan. Secure Act 2.0 would increase this limit to $10,000 for participants who turn 62, 63 or 64 during the tax year. The $10,000 limit would be adjusted annually based on increases in the cost of living.

4. Extension of plan corrections. The IRS Employee Plan Compliance Resolution System (“EPCRS”) helps correct plan failures while preserving the qualified status of the plan. Certain types of material errors may be self-corrected, if the correction occurs within three years. An example of a material error that can be self-corrected is the inadvertent exclusion of a large group of employees from a plan for several years. Secure Act 2.0 would expand the ability to self-correct major errors by removing this three-year time limit. Thus, an employer can correct a material error in the plan itself, provided that the correction is begun before the employer receives notification of an IRS audit of the plan.

5. Extended coverage for part-time workers. Generally, a qualified plan may require an employee to complete at least 1,000 hours of service in a year to be eligible to participate. Under the Secure Act, an employee who works at least 500 hours in each of three consecutive 12-month periods and has reached age 21 is eligible to make 401(k) contributions. The part-time employee would not be eligible to receive employer contributions. Secure Act 2.0 would reduce this requirement to two consecutive 12-month periods during which the employee works at least 500 hours.

6. Tax deferral on the sale of S Corporation shares to an ESOP. Under current law, a shareholder of a C corporation can defer the gain on the sale of the corporation’s stock to an employee stock ownership plan (“ESOP”) if the proceeds of the sale are reinvested in property. qualified replacement. The gain is deferred until the shareholder disposes of the qualified replacement property.

Under Secure Act 2.0, this tax deferral would be extended to allow the deferral of 10% of the gain on the sale of Corporation S stock to an ESOP.

7. Expanding MEP Availability to 403(b) Plans. The Secure Act has increased the availability of multi-employer (“MEP”) plans for for-profit entities. Secure Act 2.0 would apply similar rules to 403(b) plans, allowing nonprofit entities to participate in multi-employer plans as well.

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