In December 2021, I wrote that the then-nascent proposals to update the Setting Every Community Up for Retirement Enhancement law (aka SECURE 2.0) fell short of the stated goal of increasing retirement security for Americans. Thankfully – and no doubt through the tireless advocacy of financial wellness champions – the version finally signed into law in December 2022 (formally Division T of the 2023 Appropriations Act) was greatly improved.

It’s a sprawling piece of legislation, and much of the arcana is of most interest to wealth managers and their clients. But for AFCs, whose clientele is generally less wealthy, the merits of SECURE 2.0 are still many. 

More people will have access to a workplace retirement plan…and will do more with it.

According to  AARP, 48% of private sector employees do not have access to a workplace retirement savings plan. And of these, perhaps just more than half actually participate. SECURE 2.0 addresses both issues. 

Access to workplace retirement plans will be expanded by:

  • Bringing more part-time workers into the fold, reducing the service time requirement to two years, and extending these rules to include those in public sector or non-profit employer 403(b) plans.
  • Increasing the tax credit offered to small employers to offset the costs of starting a 401(k) plan for their employees. One of the most significant divides between the have (access to a 401(k)) and have-nots is whether or not one works for a large employer.
  • Introducing a new type of retirement plan — the Starter 401(k) — with simplified requirements and lower contribution limits, for employers who have never offered a plan before.

Participation in retirement plans will be increased by:

  • Requiring new 401(k) and 403(b) plans to auto-enroll eligible workers, at a rate of 3% of their salary.
  • Mandating new plans include an auto-escalation feature, increasing the contribution rate by 1% every year until it reaches at least 10%.
  • Allowing employers to offer small financial incentives (think gift cards and the like) to employees for contributing to their retirement plan.

Employees can harness the power of automatic payroll deduction for emergency savings.

This is one of the most exciting parts of the new law. Not only responding to a fear of commitment that many lower-income workers have about contributing to a retirement plan, SECURE 2.0 addresses the problem of “leakage” from retirement accounts. Starting in 2024, employers will be allowed to automatically enroll employees in emergency savings plans (up to 3% of their pay or $2500). Contributions would be made after-tax, and any distributions will be free of taxes and penalties.

There is a truce in the fight between student loan repayment and saving for retirement.

SECURE 2.0 addresses the hard choice many face between saving for retirement and repaying student loans. Specifically, many younger workers miss out on even the employer match for their retirement contributions because they are directing their pay to satisfy student debt. Now employers can include student loan payments when calculating their retirement plan “match.” That is, for purposes of determining whether or not an employee has made a contribution to their workplace retirement plan, the value of their student loan payment can be counted. Bottom line: More workers with more retirement savings.

And when bad things happen, your 401(k) can be more of a help.

Employers have always been able to permit early withdrawals (with penalties and taxes, of course) for employees facing serious hardships, such as a medical crisis or home foreclosure. However, procedures for determining what is or is not a “hardship” could be burdensome. Under SECURE 2.0, employees will be able to self-certify that they are experiencing a hardship, lessening the administrative burden on both employee and employer. Moreover, starting in 2024, employees will be able to withdraw $1,000 annually penalty-free for these hardships.

The ability to take a penalty-free withdrawal has been expanded to include early distributions for victims of domestic abuse and for those facing terminal illness.

Oh, but there’s more…

  • The stinginess of the Retirement Savings Contributions Credit (Saver’s Credit) has been a long-standing weakness in tax policy. As it currently stands, only households with earnings below $36,000 ($73,000 if Married Filing Jointly) can receive a tax credit for contributions to a retirement savings account. And this credit can be as little as 10% of your contribution. Worse still? It is a non-refundable credit, meaning that it is of limited utility to those with no tax liability.

The change in 2027 will be dramatic. The Saver’s Credit will become a Saver’s Match. Eligible households will receive a partial match for their contributions (up to $2,000) that will be deposited into their retirement savings account (either at work or an IRA). As with the Saver’s Credit, however, the maximum match will be 50%, phasing out as income rises. It is eliminated entirely above an income threshold similar to the one that exists today.

  • Under current law, employer matching contributions must be made “traditionally” i.e., pre-tax, even if the employee has a Roth 401(k). Now, employees will have the choice of whether they prefer to receive their employer match pre-tax or post-tax. (Fair warning, though: If post-tax, the employer match will be considered part of your Adjusted Gross Income come tax time.)
  • According to at least one 2021 survey, there may be more than 24 million “lost” 401(k) accounts i.e., accounts left dormant after an employee parts ways with their company. Trying to locate a just-remembered old account years later can be arduous. SECURE 2.0 requires the Department of Labor to stand up a searchable national “lost and found” database for retirement plans; employers will be required to report account information annually to this database.
  • But if you don’t forget your old 401(k), you should have an easier time moving it to your new employer. SECURE 2.0 will make it easier for plan administrators to offer “auto-portability,” easing the administrative burden of transferring retirement assets from one plan to another.
  • Addressing the fact that military spouses are frequently unable to participate in a 401(k) plan because their employment tenure is often too short, SECURE 2.0 provides a modest tax credit to small employers if they allow a military spouse to participate in their plan within two months of hire.

So, what didn’t get done?

With so much good in the new law, it almost feels churlish to pick a fight with the details. And yet SECURE 2.0, like any legislation, is certainly not perfect. 

  • Principally, the decision to offer, or not offer, a retirement plan remains at the employer’s discretion. According to a 2022 poll, only about half of individuals with income below $50,000 have access to a workplace retirement plan, in contrast to 79% of persons with a higher income. 
  • Many SECURE 2.0 provisions only apply to larger employers.
  • Auto-enrollment and auto-escalation requirements apply only to newly created 401(k) plans, not workplace retirement plans already in existence. This legislation, despite long-standing research that demonstrates that auto-enrollment is a game-changer for workers (particularly lower-income ones), dramatically increasing participation rates and retirement balances. 

Finally, AFCs and their clients need to be aware that SECURE 2.0 provisions will be staggered in their implementation.

The bottom line? SECURE 2.0 is a win for AFC clients. For AFCs themselves, the task now is to master its intricacies in order to guide our clients to take advantage of this opportunity to achieve financial wellness.

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