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More Change on the Horizon for Retirement Plans

Summary:
Are you familiar with the SECURE Act 2.0 and the potential changes that could affect your retirement? In this article, we discuss the many enhancements that may be important to your retirement planning.

Secure Act 2.0

The Securing a Strong Retirement Act, better known as the SECURE Act 2.0, is a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act that was signed into law on December 20, 2019. On March 29, 2022, the U.S. House of Representatives approved the SECURE Act 2.0 of 2022.

The SECURE Act 2.0 contains many enhancements to our current retirement system. Two important topics include:

  1. Required Minimum Distributions (RMDs)
  2. Current SECURE Act Regulation – In 2019, the SECURE Act revised the starting date for RMDs. The age at which RMDs would be required was increased from age 70⅟2 to age 72 for those whose 70th birthday was July 1, 2019, or later. The Act also changed the death benefit rules for retirement plans which are quite complicated and beyond the scope of this article. The required timing of distributions is based on the type of retirement plan (e.g., defined benefit or defined contribution plan) date of death of the participant, the designated beneficiary(ies), and the plan document provisions. The Act also eliminated the “stretch” life expectancy distribution rule for most non-spouse inherited IRA beneficiaries and was replaced by the “10-year rule.” This rule currently states that the inherited IRA or Roth IRA funds must be withdrawn by the end of the 10-year period after the death of the IRA owner.

At the beginning of 2022, the IRS life expectancy tables, which are used to calculate RMDs, were updated for the first time since 2002. This update will allow retirees to retain more of their money in their accounts since the tables now provide longer distribution periods which produce smaller RMDs. This will also reduce the taxation on RMDs going forward.

  • SECURE 2.0 Act Regulation – The age at which RMDs would be required would once again be raised. This time from age 72 to age 73 as of the beginning of 2023. This bill would subsequently raise the age to 74 starting in 2030 and to 75 starting in 2033.

The penalty for failure to take RMDs would be reduced from 50% to 25%. Also, if this failure is corrected promptly, the penalty would be further reduced to 10%.

  • Retirement Income Solutions
  • Current SECURE Act Regulation – Lifetime income options allow defined contributions plans to incorporate features of defined benefit plan annuity options. The passage of the SECURE Act attempts to address some of these challenges associated with the adoption of in-plan annuities. This legislation created a new safe harbor when adopting in-plan annuities with the goal to ease fiduciary liability worries and provide guidance when selecting an annuity provider so plan sponsors can feel confident in meeting their fiduciary obligations.

Section 203 of the SECURE Act now requires defined contribution plans to provide lifetime income estimates to participants.According to the DOL this is to “give savers a realistic illustration of how much monthly retirement income they could expect to receive with their account balance.”[1]

  • Pending SECURE 2.0 Act Regulation – This proposed legislation would make it easier for plans to offer annuities in the following ways:
  • Ease technical RMD requirements for annuity options
  • May permit plans to use Qualified Longevity Annuity Contracts (QLACs) as a component of a qualified default investment alternative (QDIA)
  • Increase the retirement savings that you are allowed to have when buying a QLAC policy

Other SECURE Act 2.0 Provisions

The SECURE Act 2.0 contains many helpful provisions that will most likely continue to enhance our retirement system. Some of these additional provisions include expanding automatic enrollment, increasing the limits on catch-up contributions and matching retirement plan contributions for student loan payments.  

What’s Next?

Now that this bill has been passed by the House, it will go to the Senate for potential action in April. The Senate is considering its own version of the SECURE Act 2.0, called the Security and Retirement Savings Act which contains similar provisions.[2]  It is important to note that as the bill moves through the legislative process, lawmakers may try to incorporate additional features to both the House and Senate versions.

If you have questions regarding the SECURE Act’s recent changes or the SECURE Act 2.0’s pending changes and how this may affect your plan, your local ABG representative is available to help.

[1] https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/dol-rule-requires-401ks-to-disclose-lifetime-income-estimates-on-participant-statements.aspx

[2] https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/house-passes-secure-act-2-to-promote-retirement-savings.aspx

We Are Here To Help

If you are looking for additional resources to help participants prepare for healthcare costs in retirement, your ABG representative is available to help you answer any questions you may have about planning for this extra expense in retirement.