SECURE 2.0 Passed. What Made It In?

Congress is one step closer to improving Americans’ financial security by including a host of provisions collectively known as “SECURE 2.0” in the bipartisan year-end spending deal that is expected to become law this week. The legislation builds on the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act and includes many recommendations of BPC’s Commission on Retirement Security and Personal Savings.

From small technical corrections to significant policy changes, SECURE 2.0 would expand participation and boost savings in workplace plans, extend support to small businesses trying to help their workers prepare for retirement, and ease access to lifetime income products. The package would also increase some tax incentives for the already economically secure.

Enhancing Savings Tools & Boosting Participation

A 2022 BPC-Morning Consult poll found that only 52% of individuals with household income at or below $50,000 have access to an employer-sponsored retirement plan, compared to 79% of people with higher household income. Employees want help saving—not only for retirement, but also to buffer against emergencies. SECURE 2.0 includes a variety of provisions to introduce new tools, expand coverage, increase portability, and enhance incentives for workers to save and for employers and plan sponsors to automate healthy saving behavior.

Expanding Automatic Enrollment

• Starting in 2025, requires new 401(k) and 403(b) retirement plans to automatically enroll eligible employees (with the option for the employee to opt out) at between 3% and 10% of wages, and automatically increase that amount by 1 percentage point per year until it reaches at least 10% (and not more than 15%). Exempts businesses with 10 or fewer employees, businesses that have been open for less than three years, and church and government plans.

Prioritizing Emergency Savings

• Allows defined-contribution (DC) plan sponsors to automatically enroll non-highly compensated workers into “pension-linked emergency savings accounts” (PLESAs) at up to 3% of post-tax pay alongside retirement account contributions. (Employees retain the ability to opt out or change their contribution.) Savers can withdraw funds from the PLESA tax- and penalty-free at any time. Automatic deductions continue up to an account balance of $2,500 (or a lower ceiling set by the plan), after which automatic contributions are either paused or invested in an individual’s Roth (after-tax) retirement account. Employee contributions to PLESAs are treated as retirement contributions for purposes of employer matches.
• Starting in 2024, permits DC plan sponsors to allow participants to withdraw up to $1,000 penalty-free per calendar year for emergency personal expenses. The individual must replenish the withdrawn amount before a subsequent emergency distribution is allowed during any of the following three years.

Reducing Leakage by Increasing Portability

• Allows service providers to facilitate automatic transfers from a participant’s old workplace retirement plan into their new plan upon job change to help consolidate small account balances and reduce leakage from the system. Employees always retain ability to opt out of such transfers.
• Starting in 2024, allows employers to automatically transfer account balances of former employees up to $7,000 (up from the current $5,000 limitation) into a default IRA unless the participant elects otherwise.
• By 2025, establishes a national searchable online “retirement savings lost & found” database at the Department of Labor to help individuals track down their savings that may be held with a former employer.

Enhancing Incentives to Save

• Starting in 2027, transforms the existing Saver’s Credit into a Saver’s Match by creating one credit rate of 50% (as opposed to the current tiered credit percentage), making the credit refundable (extending its reach to low-income workers without federal income tax liability), and depositing the credit amount directly into an individual’s DC account or IRA (rather than delivering it as part of a tax refund). Directs Treasury to promote the Saver’s Credit to low- and moderate-income taxpayers.
• Enables employers to offer de minimis financial incentives, such as low-dollar gift cards, to boost employee participation in workplace retirement plans.
• Starting in 2024, allows DC plan sponsors to treat student loan payments as elective deferrals eligible for employer matching contributions to the retirement plan. This would enable workers to begin building retirement savings even if they cannot afford to make employee contributions due to their student loan obligations.
• Starting in 2024, allows savers in tax-preferred 529 education accounts to rollover up to $35,000 over the course of a lifetime into a Roth IRA (subject to annual contribution limits). This provision helps families who have leftover funds to avoid the penalty that currently comes from removing 529 funds for non-educational purposes, thereby incentivizing contributions to these accounts and preserving savings. (Account must have been open for at least 15 years to qualify for these rollovers.)

Expanding Roth Options

• Enables employers to allow employees to elect for a Simplified Employee Pension Plan (SEP) or Savings Incentive Match Plan for Employees (SIMPLE) IRA to be designated as a Roth IRA. Roth accounts allow participants to contribute after-tax money so that contributions can grow and be withdrawn in retirement tax free.
• Enables employers to allow participants in 401(k), 403(b), or governmental 457(b) plans to receive their matching contributions on a Roth basis.

Prioritizing Resources for Small Employers and Their Workers

Small businesses employ 47% of American workers, but the financial and administrative obligations associated with setting up a retirement plan often deter them from doing so. As a result, their employees disproportionately struggle to save for retirement: Less than one-third of employees at the smallest companies save for retirement compared to nearly two-thirds of those at the largest. Several provisions in SECURE 2.0 address this inequity in retirement saving faced by small business owners and their employees.

Improving Coverage and Savings for Part-time Workers and Small Business Employees

• Starting in 2025, requires employers to allow part-time workers (workers with at least 500 hours per year) to participate in their retirement plan after two years of service (reduced from three years as mandated by the SECURE Act). Employees who work at least 1,000 hours must be included after one year of service.
• Creates a tax credit for employers with up to 100 employees who: make military spouses eligible to participate in their retirement plan within two months of their hiring date, ensure that each military spouse is 100% vested in all employer contributions, and guarantee that every military spouse is eligible for any matching or nonelective contribution that they otherwise would only have qualified for at two years of service. Tax credit is equal to $200 per military spouse plus up to $300 in employer contributions per individual for up to three years. This provision is designed to provide access to savings for military spouses who change jobs frequently, limiting their eligibility for and vesting in retirement plans.
• Starting in 2024, enables employers offering SIMPLE plans to make uniform additional nonelective contributions beyond 2% of compensation or 3% match (required by current law) up to the lesser of 10% of compensation or $5,000.
• Starting in 2024, raises the SIMPLE annual employee elective deferral contribution and catch-up limits ($14,000 and $3,000, respectively) by 10% for employers with no more than 25 employees. Also increases for employers with 26-100 employees if they make employer nonelective contributions of 3% or a 4% matching contribution.

Reducing Costs for Small Businesses and Non-profits

• Increases the small business startup credit to cover 100% (up from 50%) of administrative expenses up to $5,000 for the first three years of a plan established by employers with up to 50 employees. Clarifies that small businesses joining a multiple employer plan (MEP) are eligible for this credit.
• Provides a significant additional annual tax credit to employers with up to 100 employees for employer contributions to DC plans of up to $1,000 per employee. Credit phases out over five years and for employers with between 51 and 100 employees.
• Clarifies regulations to allow 403(b) plans to participate in MEPs, which can reduce costs and administrative burden for employers and participants.
• Starting in 2024, establishes Starter 401(k) plans as an option for employers not currently offering a plan to their workers. Plan requires that employer automatically enroll employees and has IRA annual employee contribution limits ($6,000, with an additional $1,000 beginning at age 50). No employer contributions are allowed.

Easing Access to Guaranteed Lifetime Income

Well-designed guaranteed income products can protect assets from longevity risk (outliving one’s assets) and market volatility while providing retirees a reliable stream of income. In fact, approximately 90% of workplace savers are interested in owning a product designed specifically to generate income in retirement. In-plan annuities, however, remain available in less than 10% of plans. SECURE 2.0 includes multiple provisions to expand the availability and adoption of these products.

Adding Flexibility for Qualified Longevity Annuity Contracts (QLACs)

• Directs the Treasury Department to dramatically reduce the limitations on purchasing Qualified Longevity Annuity Contracts (QLACs), which are deferred annuities that kick in at a later age, providing retirees with a relatively affordable form of longevity protection. New regulations will allow savers to use up to $200,000 of their retirement account balance for purchase of a QLAC.
• Clarifies that “free-look” periods (during which policy holders can terminate a policy with no penalty) of up to 90 days for QLACs are permitted.

Easing Adoption of Annuitization and Adjusting Penalties

• Loosens the “minimum income threshold test” to allow more flexibility in the structure of annuities that comply with required minimum distribution (RMD) rules.
• Directs the Treasury Department to remove a disincentive for annuitization by reforming RMD rules for individuals holding retirement plans that are partially annuitized. Individuals currently must take greater RMDs when partially annuitized than if they had no annuitization; this reform equalizes the treatment.
• Reduces the excise tax for failure to take an RMD from 50% to 25% (and from 25% to 10% if the mistake is corrected in a timely manner) of the net amount an individual was supposed to take.

Increasing Tax Incentives for the Wealthy

Some provisions in SECURE 2.0—primarily those focused on RMD rules and catch-up contributions—are costly and poorly targeted at those who need support saving for retirement. These provisions would accrue benefits to a narrow group of high-income and high-wealth individuals.

• Increases the age at which one must begin taking RMDs from 72 to 75, phased in over 10 years.
• Starting in 2025, increases the limit on catch-up contributions to 401(k), 403(b), and governmental 457(b) plans from $6,500 ($3,000 for SIMPLE plans) to $10,000 ($5,000 for SIMPLE plans) for those aged 60-63. Indexes these limits to cost-of-living adjustments (like the existing limits for those aged 50 and older).