Top 9 Retirement Changes in 'Secure 2.0' Bill That's Headed to House

2. Expands Auto-Enrollment in Retirement Plans

The bill requires 401(k) and 403(b) plans to automatically enroll participants when they become eligible; employees may opt out of coverage. The initial automatic enrollment amount is at least 3% but no more than 10%, then each year that amount is increased by 1% until it reaches 10%. All current 401(k) and 403(b) plans are grandfathered. There is an exception for small businesses with 10 or fewer employees, new businesses (i.e., have been in business for less than three years), church plans and governmental plans.

3. Indexes IRA Catch-Up Limit

Under current law, the limit on IRA contributions is increased by $1,000 (not indexed) for individuals who have attained age 50. The bill indexes such limits starting in 2023.

4. Higher Catch-Up Limits at age 62, 63 and 64

Under current law, employees who have turned 50 are permitted to make catch-up contributions under a retirement plan. The limit on catch-up contributions for 2021 is $6,500, except in the case of SIMPLE plans, for which the limit is $3,000. The Act increases these limits to $10,000 and $5,000 (both indexed), respectively, for individuals who have attained ages 62, 63 and 64, but not age 65.

5. Student Loan Payments and Employer Matching

The Secure Act 2.0 permits an employer to make matching contributions under a 401(k) plan, 403(b) plan or SIMPLE IRA with respect to “qualified student loan payments.” The provision is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt, and missing out on available matching contributions.

6. Boosts Small Employer Pension Plan Startup Credit

Makes changes to the credit by: Increasing the startup credit from 50% to 100% for employers with up to 50 employees, and except in the case of defined benefit plans, an additional credit would be provided. The amount of the new credit generally would be a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000.

7. Allows CITs in 403(b) Plans

Under current law, 403(b) plan investments are generally limited to annuity contracts and mutual funds. This limitation cuts off 403(b) plan participants — generally employees of charities and public educational organizations — from access to collective investment trusts, which are often used by 401(a) plans due to their lower fees. The bill permits 403(b) custodial accounts to invest in collective investment trusts.

The bill amends the securities laws to treat 403(b) plans like 401(a) plans with respect to their ability to invest in collective investment trusts, provided that: (1) the plan is subject to ERISA, (2) the plan sponsor accepts fiduciary responsibility for selecting the investments that participants can select under the plan, (3) the plan is a governmental plan, or (4) the plan has a separate exemption from the securities rules. These changes would increase the availability of low-cost collective investment trust options for retirement savers and conform the securities law rules for 401(a) plans and 403(b) annuities.

8. Opens the Door for ETFs in Variable Annuities

Secure 2.0 directs the Treasury Department to update regulations to facilitate the creation of a new type of ETF that is “insurance-dedicated.” The update would provide that ownership of an ETF’s shares by certain types of institutions that are necessary to the ETF’s structure would not preclude look-through treatment for the ETF, as long as it otherwise satisfies the current-law requirements for look-through treatment. Treasury regulations have prevented ETFs from being widely available through individual variable annuities. ETFs cannot satisfy the regulatory requirements to be “insurance-dedicated.”

9. Multiple Employer 403(b) Plans

The bill allows 403(b) plans to participate in MEPs, including pooled employer plans (“PEPs”), generally under the SECURE Act rules, including relief from the one bad apple rule so that the violations of one employer do not affect the tax treatment of employees of compliant employers.

The bill also includes provisions affecting annuities.