SECURE ACT 2.0, The 'Pay For', Part 3

 

In the previous 2 posts on this subject, we discussed SECURE 2.0 and highlighted some of my favorite parts.  We're going to wrap up this series with my last two favorite provisions, which interestingly fall on the side of revenue generators.  As a reminder, this is a new piece of proposed bipartisan legislation seeking to improve retirement plans.  While there are more steps to this Act becoming a law, I feel pretty confident that this one has legs, and candidly, that's GREAT news for the retirement plan community and our clients.  I think this will get done in 2021 with implementation of many of the provisions in 2022. 

For a an amazing summary of all of the new provisions contained within the final mark-up, here's a link What's in SECURE 2.0?.

The What:

Committee Chairman Richard Neal (D-MA), along with the Committee’s ranking Republican, Rep. Kevin Brady (R-TX), first introduced the bill, Securing a Strong Retirement Act (SSRA), last October as a sequel to the 2019 SECURE Act. While that version of the bill included some 36 provisions, the new Securing a Strong Retirement Act of 2021 (H.R. 2954) now contains about 45 provisions, including new revenue offsets to pay for the bill. 

My Favorite Few Provisions continued, part 3: 

These final two provisions we're looking at in the series work together in my opinion as they're engineered to create more tax based flexibility for individuals while at the same time allowing immediate tax revenue to be generated to help pay for all of the new benefits.  They are estimating that these provisions could raise as much as $27 billion in new revenue over a 10-year period.  This 10-year period is important because while retirement plan benefits can spread over lifetimes, congress only looks at tax over ten year periods.  One way to think of this is that it's the 'Rothification of Retirement' as is discussed in this excellent piece in Think Advisor. 

SIMPLE and SEP Roth IRAs: Most employers and individuals have heard of the most famous Internal Revenue Code, Section 401(k).  However, many small employers opt not to install a 401(k) because of the costs, risks and compliance requirements.  Back in late 1990's this was addressed by creating a hybrid type employer sponsored retirement plan that took on the characteristics of both IRAs and 401(k)s called a SIMPLE IRA.  While these are lesser known, they can be very valuable benefits and also "starter" retirement plans for business'.  

Under current law a SIMPLE IRAs and Simplified Employee Pensions (SEPS) are solely tax deferred vehicles.  SECURE 2.0 changes this so that they could be designated as Roth.  Like other ROTHs, contributions made in this manner would be subject to current year taxes, but the growth on such contributions would be tax free.  ERISA qualified DC plans (401(k), 403(b), etc.) currently allow for such contributions and this closes the door on that distinction between the two structures.  This proposal applies to tax years beginning after Dec. 31, 2021.  

EMPLOYER MATCH as ROTH too??!!!

Just like the previous provision in reference to SIMPLE IRAs and SEPs, the proposal allows for a new contribution source in 401(a), 401(k), 403(b) and 457(b) plans.  The ROTH EMPLOYER MATCH!  Similarly, just like other ROTH structures, the taxation of this works the same way, the contribution is immediately taxable, and the growth grows tax free and is tax free upon distribution from the plan.  This one is interesting to me not because of the ROTH part, but because these are employer dollars being contributed to an employees plan, BUT will need to be included in the gross income of that employee today.  I suspect the payroll providers are going to have a little programming to do in order to accommodate this on pay stubs and W-2s.  That said, I like it.  My view on ROTH has never been ROTH (After-Tax grows tax free) is necessarily better than traditional deferral (Pre-Tax grows Tax deferred) or vice versa, but rather it allows for strategic tax diversification at retirement which can be highly beneficial during someone's decumulation phase when they're taking distributions.  

This concludes the series on SECURE 2.0.  Please be sure to subscribe to the feed for more blog content in the future.

- Jason Grantz, QPA, QKC, QKA, AIFA