Interview with Mark Iwry on SECURE 2.0, and What Comes Next
Sitting in the seat of a DC plan sponsor, what are the top to-do's with regards to SECURE 2.0 implementations and changes that plan sponsors should consider right away? What do you think plan sponsors should ‘wait and see’ on before acting?
The enactment of new retirement legislation generally means plan sponsors are presented with two basic types of questions. The first thing they need to ask is, “What does this require us to do, and by when?” And to address this question sensibly, it’s important to consider --
- whether the regulators are expected to issue any near-term guidance shedding further light on how to comply and on any degrees of freedom or optionality, and
- whether plan sponsors have time to wait for any such guidance before making their decisions.
The second basic type of question for plan sponsors assembling their to-do list relates to new options: does the new law present any new opportunities or choices for us; and, if so, what are the time frames or deadlines?
SECURE 2.0 imposes few requirements but offers plan sponsors a variety of new opportunities and options. This is because everyone understood from the outset that this legislation would need bipartisan support, and not many requirements on plans will win support from both Democrats and Republicans.
Can you give us some examples of new SECURE 2.0 requirements?
One requirement is to limit DC plan catchup contributions – the extra amounts, over the regular limit of $22,500 on employee contributions in 2023, that plan participants age 50 or over can contribute. Starting in 2024, if participants who earned over $145,000 from the plan sponsor in the previous year want to make catchup contributions, those can only be Roth type instead of pretax contributions.
Why would Congress do this? Not because they think it’s better policy but rather because, under the arcane congressional budget rules, shifting from pretax to Roth contributions is treated as a cost-saving move. It frees up money Congress can then spend on other measures, like raising the required minimum distribution (RMD) beginning age from 72 to 73 and eventually 75. (By the way, a drafting error in the legislation inadvertently casts doubt on whether ANY catchup contributions will be permitted for 2024, but, not to worry, this glitch will surely be fixed one way or another.)
Another major requirement: 401(k) and 403(b) plans established on or after December 29, 2022 (the date SECURE 2.0 was signed into law) will need to use automatic enrollment (the opt-out approach) and automatic escalation of contribution rates starting in 2025. Plans existing before SECURE 2.0, employers with 10 or fewer employees, and employers in business less than 3 years are all exempted from this requirement.
Also, SECURE 2.0 includes new plan participation requirements for part-time employees and delays the start of required minimum distributions (RMDs) from age 72 to age 73, so plan sponsors and/or recordkeepers need to change their systems and communications accordingly. The delay from age 72 to 73 takes effect immediately, but applies only to participants who turn 72 in 2023 or later.
What about new options and opportunities?
Among many new options, DC plan sponsors could decide whether to
- give participants the option – which they can implement right away if they want to -- to receive any employer contributions in Roth form rather than pretax (as is currently the case),
- offer employer matching of student loan repayments,
- include special accounts for emergency savings,
- include options for emergency personal distributions and other new special penalty-free distribution events, or
- take advantage of the option for 403(b) plans to participate in MEPs and PEPs; for SIMPLE-IRAs or SEPs to offer Roth accounts, or for qualified plans to offer eligible employees small cash or gift card incentives to participate, etc.
As a general rule, it takes a while for the regulators to issue guidance, and in many cases plans are protected if they implemented earlier and guessed wrong about what guidance ultimately permits. But over time, I’ve found it’s often wise for plan sponsors, if they can, to wait and see what the guidance looks like, especially when it comes to adopting plan amendments reflecting the changes. As a general rule, they who amend last amend best.
The passage of SECURE 2.0 took a few years and turns before its incorporation into the omnibus bill. What was the biggest surprise to you in the final version of the bill?
Not much in SECURE 2.0 surprised me, as I was in frequent contact back and forth with congressional staff and was heavily involved in the development of the bill (and SECURE 1.0). In particular, SECURE 2.0 expanded a half dozen significant provisions that I’d originally developed, co-authored, or spearheaded – the saver’s credit, 401(k) automatic enrollment, the SIMPLE-IRA plan, the QLAC longevity annuity in DC plans and IRAs, the startup tax credit for small businesses adopting a new plan, and EPCRS self-correction of auto-enrollment failures -- and I was involved in suggesting and negotiating revisions to other provisions, such as emergency saving, auto-portability for employees changing jobs, Treasury rollover guidance, and the new small taxable incentive. That said, two surprises in the final version of the bill do stand out: the failure to get permission for 403(b) plans to invest using collective investment trusts and success in making the saver’s credit refundable (i.e., extending it to savers who have no income tax liability).
If you would like to reach out to Mark for further questions, please email him at jmarkiwry@gmail.com.
Hear more on SECURE 2.0 and future retirement legislative actions at our upcoming Chicago Forum on April 18 and 19 at the Four Seasons Hotel Chicago - register or reach out to jon.ljekocevic@institutionalinvestor.com for more information.