Important changes to retirement plan tax rules are once again moving through Congress. The details are subject to revision and ultimate passage of the proposed new rules is still far from certain. Nevertheless, employers who are planning to introduce new retirement benefits or modify their existing plans should be alert to possible rule changes that could emerge over the coming months.

The Current State of Pending Revisions

On March 29, the U.S. House of Representatives overwhelmingly approved HR 2954, the Securing a Strong Retirement Act of 2021 [https://www.congress.gov/bill/117th-congress/house-bill/2954/text] by a vote of 414 to 5. The bill, dubbed “SECURE Act 2.0,” builds on the original Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was signed into law in 2019.

SECURE Act 2.0 has now moved to the Senate, which is working on its own version of retirement plan reform. The Senate bill, the Retirement Security and Savings Act, is currently in the hands of the Finance Committee. If the full Senate eventually passes it, as expected, the two chambers would then need to reconcile their separate versions.

There are no guarantees, of course, especially in an election year, but many observers expect Congress to pass some version of retirement plan reform before the end of this year. Employers should be prepared to update or modify their retirement programs to comply with new requirements and to take advantage of new incentives that are likely to be included in the final version.

Potential Changes to Watch

The details will undoubtedly be tweaked during the reconciliation process, but many of the provisions in the House bill appear to have broad Senate support as well and are considered likely to appear in the final version. Here are some of the more significant features of SECURE Act 2.0 that employers should be watching:

• Mandatory Automatic Enrollment. One of the main provisions is a requirement that employers who establish new 401(k) or 403(b) defined contribution plans must automatically enroll workers when they become eligible, rather than having employees opt in. The initial employee contribution rate would be at least 3 percent of the employee’s compensation, increasing annually until it reaches 10 percent. Employees would still have the option to opt out of automatic enrollment. Businesses with existing plans, those with 10 or fewer employees, and companies that are less than three years old would be exempt from this requirement.
• Small Business Tax Credits. SECURE Act 2.0 would offer increased tax credits for small businesses that start a retirement plan. Beginning in 2023, the current three-year small-business retirement plan startup credit of 50 percent of administrative costs would increase to 100 percent for employers with 50 or fewer employees, with an annual maximum credit of $5,000. The bill also provides an additional tax credit for a portion of the employer’s contributions, up to a maximum credit of $1,000 per employee.
• Roth Contributions. Under current law, employers contribute on a pretax basis, so employees are taxed when they receive distributions from the plan. SECURE Act 2.0 would let employees elect to treat all or part of employer contributions as Roth contributions, resulting in tax-free growth but current taxation.
• Delayed Required Minimum Distributions. The original SECURE Act increased the age at which plan participants must start taking mandatory distributions to age 72. SECURE Act 2.0 would increase that further to age 73 in 2023, 74 in 2030, and 75 in 2033. It would also significantly reduce the penalty for failing to take a required distribution.
• Expanded Catch-up Contributions. After 2023, employees ages 62 through 64 could make additional catch-up contributions of up to $10,000 annually to their 401(k) plans, or up to $5,000 to SIMPLE 401(k) or SIMPLE IRA plans. Those amounts would be indexed for inflation. The existing $6,500 catch-up contributions for employees ages 50 or older would also be indexed for inflation. In addition, the proposed law would require all catch-up contributions made to qualified retirement plans after Jan. 1, 2022 to be treated as Roth contributions subject to current taxation.
• Owner Exit Planning. Currently, only the gain from the sale of C corporation shares to an Employee Stock Purchase Plan can be deferred. SECURE Act 2.0 would allow 10 percent of the gain from the sale of S corporation stock to be eligible for a similar gain deferral.
• Other Plan Changes. SECURE Act 2.0 would enhance participation of long-term part-time workers by shortening the eligibility period from three years to two years. Other provisions would allow employers to match employees’ student loan payments as retirement contributions, and eliminate certain barriers to offering lifetime income annuities as a retirement plan investment option.

These proposed changes are not yet final, and the details are still subject to change, but the strong bipartisan support in Congress for additional retirement plan incentives increases the likelihood of passage. Employers should monitor both bills’ progress and work with their tax professionals to evaluate their potential impact and benefits.

Reach out to Holbrook & Manter for more information and for help with this and other tax related matters.