The potential rework of how retirement contributions are allocated in Secure Act 2.0 shows innovation and benefits for many.
As our fearless leaders in Washington debate the merits of yet another omnibus spending bill, House Ways and Means Chairman Richard Neal and Kevin Brady are maneuvering to try and reintroduce Secure Act 2.0. as part of the spending bill.
Secure Act 2.0 surfaced in 2021 and passed with unanimous bipartisan support in the Ways and Means committee before stalling out in the legislator last summer. The bill contains many advantageous provisions for savers. Still, I wanted to focus on three simple changes of how contributions are allocated or credited in retirement plans because sometimes, minor rule changes can have the most significant impact.
Employer Roth Matching Contributions: Section 604 of H.R. 2954 allows an employee to designate how employer matching contributions are allocated. Previously, employers had to make all safe harbor or other mandatory matching elections pre-tax to satisfy ERISA rules. Now, employees could have greater control over where all their workplace savings dollars go. Congress is rolling out these provisions with the idea that it is a revenue-raising opportunity. Still, the opportunity to pay taxes now when taxes are at a historical low point rewards many on their matched dollars in their 401K.
A New Bracket for Catch-Up Contributions: Section 107 of H.R. 2954 creates a higher bracket for savers approaching retirement. The original over 50 catch-up rules remain ($6,500), but now the limit would be increased to $10,000 once you turn 62 and indexed for inflation. Right now, the new catch-up provision applies to ages 62-4, but it's possible this could be expanded in the proposal. There is also talk of making all catch-up contributions be in a Roth-based investment. Another revenue-raising move by congress, but if this ever passed, I think it would significantly enhance the use of Roth's inside 401K and help more people manage their taxes in retirement.
Changes On Elective Deferrals for Employees Who Pay Off Student Loans: This is my favorite part of the proposed act. Paragraph 13 of section 109 proposes that if an employee makes a payment that is a "qualified student loan payment," it can also meet the test as a deferral for matching under a qualified retirement plan. I rarely call legislators innovative, but this might be an exception. Student loan debt in this country is a major problem, and anything we can do to encourage repayment, I think, is a win. It also encourages younger workers to save and not be forced to decide between retirement matches and debt reduction.
These employer deferrals are subject to normal vesting rules, so it could be a great tool for recruiting and retaining talent in the workplace. An increased employer match may help companies stand out in today's competitive markets while doing something good for the workforce.
There are still hurdles to overcome before calling Secure Act 2.0 a reality, but it is encouraging to see lawmakers repurposing the bill. I am hoping that congress finds a way to pass this in 2022 because anything we can do now to enhance the retirement prospects of America would be a positive.