With Thanksgiving behind us and the holiday season approaching, the nation waits with bated breath to see what legislation Congress is able to pass in this session. On the agenda in Washington is an important set of proposals, dubbed Secure Act 2.0, that could have a profound effect on the way that Americans save for retirement. We do not yet know whether these proposals will pass before the end of the year. However, given that both the House and the Senate have been slicing and dicing various iterations of the anticipated new rules for over two years, there does appear to be the will and momentum to enact this legislation in some form or another. Set out below is a brief summary of some of the key provisions that are under consideration.
Changes to RMD rules: required minimum distributions will not be required until age 73. This will increase to 74 in 2029 and 75 in 2032. The proposals will also reduce the penalty for failure to comply with RMD rules from 50% to 10% or 25% if the failure to comply is corrected promptly.
Catch up contributions: these allow people to make additional contributions above the standard maximum contributions to retirement plans. There are various proposals under discussion, but the intention is that people in their early 60s will be able to add $10,000 to a 401(k) or 403(b) plan. These catch up contributions would be subjected to Roth (ie after tax) treatment.
Automatic enrollment in retirement plans. The new rules will require employers with 401(k) or 403(b) plans to automatically enroll all new, eligible employees at a 3% contribution rate that would increase by 1% annually until it reaches 10%.
Penalty free early withdrawals: under current law, the 10% penalty for early withdrawals is waived only in very specific circumstances, namely to meet birth or adoption expenses, and provided those expenses are repaid to the plan. Under the new proposals, repayment will need to be made within 3 years in order for the penalty to be waived. Penalty-free withdrawals will also be permitted in a wider range of situations, including where a person has been subject to hardship due to domestic abuse; where a terminally ill plan participant makes withdrawals (up to $22,000); or where distributions are made to pay premiums on certain long term care policies (up to $2,500 per year).
Student loan debt: it is common for employees who have student loan debt to delay making contributions to a retirement account until that debt has been paid off. New rules will permit employers to make contributions to retirement accounts on behalf of such employees, even if no contributions are made by the employees themselves.
There are differences between the measures that have already been approved by the House and the bills under consideration by the Senate, so it is possible that the ultimate package will look different to the items outlined above. However, it is important to be aware of the types of changes that may be brought about if Secure 2.0 is passed. Given how close Congress is to finalizing these measures, there is every incentive for our elected representatives to pass this legislation before the end of the year. Failure to do so will mean these proposals all need to be debated again from scratch when the new Congressional session starts in the new year.