Did you know there is a savings and retirement crisis in the United States? Today, a look at the SECURE Act 1.0 and 2.0 - legislation aiming to help address issues surrounding the retirement crisis.
High level look at the state of savings & retirement in the United States
When it comes to saving right for your life, where do you start? How do you know you can save? The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Over the last 70 years, the CPI has steadily increased, the percent changes in the price index measure the inflation rate between any two time periods. If wage increases do not match the inflation, it essentially becomes more expensive to live the same life you were before, because your dollars do not go as far. And as we all know, the federal minimum wage has not increased since 2009. In May 2009, the CPI was 213, today, the CPI is 287. Check out this graph from FRED of the CPI over time:
A common budgeting methodology is the 50/30/20 method: allocate 50% of one’s income for needs, 30% for wants, and 20% for savings. Are most Americans able to follow this methodology? CNN reported 56% of Americans surveyed are unable to cover an unexpected $1,000 bill with savings. The general idea around "financial health" is that one should have an "emergency fund" to cover between six and nine months of living expenses or large, unexpected costs. The Motley Fool reported in 2020 that the median savings amount for Americans was $3,500, while the mean was $26,619.
When it comes to retirement, how does that factor into your savings? Many say that 15% of your income should go towards saving for your retirement. According to Forbes, roughly half of Americans do not save for retirement. If you take into account the fact that around 14% of Americans have student loan debt and cost of living and inflation is significantly outpacing income increases, where are people supposed to get this money to put aside for retirement?
What is the SECURE Act 1.0?
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, or US HR 1994, was signed into law in December, 2019 as part of the Further Consolidated Appropriations Act.
Primarily, this bill provided tax credits and protections on collective Multiple Employer Plans, aimed at making it easier for small businesses to offer their employees 401(k) plans. SECURE 1.0 also allows retirement benefits for long-term, part-time employees. The bill addressed age limits by removing maximum age limits on retirement contributions and raising the required minimum distribution (RMD) age from 70½ to 72.
Penalty-free withdrawals were also improved. SECURE 1.0 allows for withdrawals for the birth or adoption of a child of up to $5,000 from retirement plans. It also allows for withdrawals for the repayment of certain student loans of up to $10,000 from 529 education-savings plans.
Components of the Tax Cuts and Jobs Act which raised taxes on benefits received by family members of students, some Native Americans, and deceased veterans were revised by SECURE 1.0 as well.
What is the SECURE Act 2.0?
Securing a Strong Retirement Act, or SECURE 2.0, builds upon builds on the Setting Every Community Up for Retirement Enhancement Act (SECURE 1.0). At a high level, Secure Act 2.0 requires most employer-sponsored retirement plans to automatically enroll workers, makes it easier for student-loan borrowers to save, helps small businesses by lowering small business retirement plan administration costs, addresses different aspects of Roth, and more. Let's take a look at the major points in the Securing a Strong Retirement Act.
Mandatory, Automatic Enrollment
Employers that establish defined contribution plans after 2021 will be required to automatically enroll new, eligible employees at a level of 3 percent pre tax contribution of the employee's pay. This contribution level would increase annually by 1 percent until the percentage contributed has increased up to at least 10 percent but not more than 15 percent of the employee's pay. If an employee desires, they could affirmatively elect a different contribution level.
Small businesses (defined as 10 or fewer employees or in business less than than 3 years), churches, and governmental plans are exempted from this requirement.
Expand Catch-Up Contributions and Roth
Currently, employees age 50 or older are allowed to make extra, "catch-up" contributions to their plan (a 401(k) or similar). In 2021, the limit on catch-up contributions was $6,500 for employees 50 or older. SECURE 2.0 increases the annual catch-up amount from $6,500 to $10,000 for participants ages 62 through 64, beginning in 2023. For participants 50-61, the contribution limit would remain at $6,500. These limits are indexed for inflation.
The current law allows for catch-up contributions to be made on a pre-tax or Roth basis (if permitted by the plan sponsor) for qualified retirement plans offered by employers. Under SECURE 2.0, all catch-up contributions to qualified employer-sponsored retirement plans would be subject to Roth tax treatment effective Jan. 1, 2022. The bill also allows plan sponsors to offer the option to employees to elect some or all of their matching contributions to be treated as Roth contributions for 401(k) plans. If an employee does elect this, the Roth designated employer match would not be excludable from employees' gross income.
Individual retirement account (IRA) catch-up amounts are limited to $1,000 (not indexed) for individuals over 50. Starting in 2023, SECURE 2.0 indexes this limit for inflation.
Delay Mandatory Distributions
SECURE 1.0 increased the mandatory distribution age to 72. SECURE 2.0 would further increase the required minimum distribution age to 73 starting in 2022. The bill would increase this age twice more: to 74 starting in 2029 and to 75 starting in 2032.
Worker Participation & Credits
SECURE 1.0 expanded eligibility to contribute to 401(k) plans for long-term, part-time workers. SECURE 2.0 would shorten the measurement period for eligibility (starting in 2021) from three years to two years.
This bill also requires the Treasury Secretary to increase public awareness of the Retirement Savings Contributions Credit (the saver's credit). This credit is available to low- and moderate-income workers.
Student-Loan Matching
SECURE 2.0 would provide a statutory basis for employers to adopt making matching contributions for employees who are paying off student loans, whether they are contributing to their employer sponsored 401(k) or not. In 2018, the IRS opened the door for allowing employers to make 401(k) matching contributions based on employees' student-loan payments. Although they allowed, no authorizing legislation passed to regulate this action. Most notable about this change, is employees receiving the match are not required to be making retirement contributions themselves to qualify. Matching contributions for student loan payments are required vest under the same schedule as other matching contributions.
Account Management Changes
SECURE 2.0 would create a national database for Americans to find lost retirement accounts. The bill would also expand self-correction opportunities, including for participant loan errors and employee elective deferral failures.
What is the Retirement Security and Savings Act?
The Retirement Security and Savings Act, known as the Senate's approach to addressing the retirement crisis, contains many similar provisions as SECURE 2.0, as well as some differences. First, there is no provision requiring automatic enrollment. Second, the Senate bill would increase 401(k) catch-up contribution limits from $6,500 to $10,000 for participants over age 60. SECURE 2.0 phases in a $10,000 cap between the ages of 62 and 64. Third, SECURE 2.0 has the ramp increase for the required minimum distribution from 73 beginning in 2022 to 75 beginning in 2032, the Senate bill would increase the age to 75 in 2032 without the ramp.
If the Senate takes up and passes the Retirement Security and Savings Act, most likely the House and Senate will reconcile their separate bills. But, there is a spending bill that includes SECURE 2.0 the Senate could be asked to vote on. Let's see if either of these make any more headway this year!
Cover Photo by Towfiqu barbhuiya on Unsplash
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