April 5, 2022

The U.S. House of Representatives recently passed Securing a Strong Retirement Act, H.R. 2954, also called the SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0. This bill enhances rules beyond those established by SECURE Act 1 of 2019. Simultaneous to this there are new IRS-proposed regulations on IRAs.

None of the following are final, not the bill passed by the House, not the IRS proposed regulations. Changes can happen after bantering, public commentary, and input from professionals, but there is strong indication much of what is in the bill may come to pass. The House overwhelmingly passed the bill, with only a handful of no votes, and the Senate has its similar version, but you know how this goes.

So, reading the leaves in the teacup:

  • Proposal to make 401(k) contributions automatic for employees, starting at 3% and increasing every year until reaching a 10% maximum. Employees can elect out of the contribution or elect a different amount. There are exceptions for very small employers, new businesses, and certain existing plans. If an employee doesn’t choose an investment election, there will be default investments. This is good for employees but may create more compliance concerns for employers.
  • Participants ages 62-64 can make a larger catch-up contribution of $10,000 starting in 2024, up from the current $6,500, but it must go into a Roth 401(k), which is not tax-deductible. That means more tax for the IRS now, with an employee benefit of the funds and growth being tax-free upon distribution. There are some other special catch-up changes to other plans.
  • Employees participating in 401(k) and Roth 401(k) plans could elect an amount of their employer match to be allocated to the Roth instead of the pre-tax plan. This employer match amount would be currently included in their income. Again, this means more current income for the IRS. Employers could use student loan payments as a basis for matching contributions, a way to get money to employees who cannot currently afford to participate in 401(k) plans. Such matches with the same vesting provisions as other employer matches.
  • Required Minimum Distributions (RMD) were already raised to age 72 under SECURE Act 1. The House bill would further raise the ages for RMD, but by curious brackets:  
    • Age 73 starting in 2023 (when reaching 72 between 2023-29)
    • Age 74 starting in 2030 (when reaching 73 between 2030-31)
    • Age 75 starting in 2033 (when reaching 74 in 2032 or later)

For those who are working later or don’t need the money now, further deferral allows a buildup in the plan. The combination of shorter life expectancy plus higher balances from growth might make for larger distributions in later years:

  • There are no apparent changes to RMD rules for non-IRA plan balances of those still working past RMD age but owning less than 5% of the business.
  • There may be some possible loosening of the rules related to lifetime annuities as a retirement investment option plus exclusion from RMD rules, so stay tuned on this one, as it could be very interesting.
  • Further confusing some of this is the philosophical inconsistency contained in the 275 pages of IRS-proposed regulation on IRAs. These are only proposed regulations and will receive much commentary and criticism because of the IRS flip-flopping. The last flop is the IRS wanting to not allow some secondary beneficiaries of IRAs to defer distribution until year 10, which is in direct conflict with its earlier clarification, which did not require distributions in years 1-9. So, while the House bill lengthens the time before distributions are required, the IRS is shortening the payout term for secondary beneficiaries. Huh?

Is your financial plan ready to respond to any of these proposed changes? The Friedman + Huey team can help you navigate the complexities and create an adaptable approach if necessary. Contact us today!

DISCLAIMER: This information is general, not specific, and is only meant to give perspectives on matters discussed, which may change without notice. It is not intended to be tax or financial advice. Information has been obtained from various sources believed to be reliable, but interpretations and accuracy are not assured. Please contact us for any questions you may have or to revisit your planning strategies.