ARE YOU FEELING SECURE? SECURE 2.0, PART 2

In my previous post, I mentioned that it was the start of a three-part series discussing SECURE 2.0 highlighting some of my favorite parts.  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:

These next two provisions I think work together as they're adjustments to the existing provisions.  Specifically, we're moving back the ages on certain rules allowing greater savings and potentially delaying when taxes need to be recouped which aligns with trends towards working longer and increases in life expectancy over the last several decades.

New Required Beginning Dates for RMDs: What's an RMD?  RMD's or Required Minimum Distributions are the requirements placed on retirees to codify the oldest age they can attain before they MUST start taking distributions from their tax advantaged accounts and start paying taxes.  For many years, really decades, the age was set to 70 1/2.  In the first SECURE ACT it was moved back to age 72.  In this new rule, it piggy back's on this to expand the age ultimately back to age 75.  My take is that I think it's going to be a bit confusing to implement, but I like what they're trying to do.  Essentially, what the rule says is that for those who want to delay tapping their IRAs or retirement plans for as long as possible, they'll have more time depending on what age bracket they fall in.  While I like this idea, I'm not a fan of the 'how' on this as I think it's going to cause confusion and will need care and attention paid to it instead of making it simple.  Here's how it will work.

The Phase-In: The new rules will require a phase in of the required beginning date from the calendar year in which the employee or IRA owner attains age 72 to the calendar year in which the employee or IRA owner attains age 73.  This is ONLY for individuals who attain age 72 after Dec. 31, 2021, and who attain age 73 before Jan. 1, 2029. But if you're not in that window, there's a second and third tier as follows;

The proposal changes such age from 73 to 74 for individuals who attain age 73 after Dec. 31, 2028, and who attain age 74 before Jan. 1, 2032.  With the third tier further increasing the RMD age to 75 for individuals who attain age 74 after Dec. 31, 2031. T

In short, GREAT idea, but this is going to require some attention to detail for practitioners.

Higher Catch-up Limit to Apply at Age 62, 63 and 64: What's Catch-up?  The current rule stipulates that if you a participant has attained age 50, that they can defer more than the statutory limit to their 401(k) plan (and certain other plans).  The deferral limit in 2021 is $19,500 and those over 50 can do an additional $6500 for a total of $26,000. The idea is to help aid workers in "catching up" for the earlier years in their careers where they weren't able to contribute to the maximum.  

In this new legislation it raises the amount of the catch-up contributions to $10,000 for those who have attained age 62, 63 or 64, but interestingly ONLY for those three ages and NOT for those older than 64.  This would apply to those in employer-sponsored 401(k) and 403(b) plans. Similar provisions with different amounts would apply to SIMPLE IRAs. For those aged 50-61, the provision retains the existing catch-up contribution limits. In addition, these changes would also be indexed for inflation like current limits, starting in calendar year 2023. The provision applies to tax years beginning after Dec. 31, 2022.

My take, I very much like the idea here, people are woefully behind on saving for retirement, so anything that allows more money to get put away I'm in favor of.  However, just like the RMD provision, this one is going to require someone to pay attention to ensure that the increase happens precisely in the three-year age window.  I'd like this one to be fixed to basically increase it starting at 62 and not stopping it at 64.  

On our final installment of SECURE 2.0, we're going to address two of the provisions that are categorized as Revenue Generators to help pay for this and keep it as Revenue Neutral as possible. 

- Jason Grantz, QPA, QKC, QKA, AIFA

 

In Plan Roth Conversions

The Small Business Jobs and Credit Act, which was signed by President Obama in September 2010, permits 401(k) and 403(b) plans that have a Roth deferral program in place to also provide for an in-plan Roth rollover provision. This will be extended to 457(b) plans for plan years beginning after December 31, 2010.

An in-plan Roth rollover feature allows a participant who is eligible for a distribution to roll any vested amount to an in-plan Roth rollover account. If amounts are converted in 2010, the taxpayer can choose to recognize the income in 2011 and 2012 instead of in the year of the roll over.

Previously, a participant who wanted to convert to a Roth had to do this outside the retirement plan by rolling the money to a Roth IRA.

For more general information on implementing this feature, please follow the link to more frequently asked questions. Click here.

Senate Passes Roth 401(k) Rollover Provision!

Today, the Senate passed a small-business jobs bill, H.R. 5297, which among other things would allow employers to amend their 401(k) plans immediately to allow participants to roll over pre-tax account balances into Roth 401(k) plan accounts.

The House has not yet acted on the proposal, and it remains to be seen if this will make into law. However, this step by the Senate is a very encouraging sign that this feature will at some point make it into law whether attached to this bill or some other.

According to the bill, it would also allow for some spreading of immediate tax over several years. For example, if a participant were to convert their pre-tax deferrals to a Roth 401(k) this year, taxation could be elected to be paid in 2011 and 2012.

We see this as a big step in increasing tax flexibility to be in line with what is currently available in IRAs. Additionally, another very real benefit is that in 401(k)s, often times the institutional pricing structure of the underlying investments makes this a better deal than for those in IRAs where mutual funds and the like are generally retail priced and thus more expensive. If passed, this could be a strong incentive for investors to finance their retirement from their 401(k) Plans rather than rolling to IRAs and financing that way. Every bit helps especially with the coming wave of retiring baby boomes.

Hodge Podge, Loose Ends and Good Ideas....

Over the past few months there have been a lot of topics being discussed as various bills get proposed, some get passed, many sunset and others get extended. Some of the topics that have been written about repeatedly include “Roth or Not Roth”, the issues of the proposed participant-level advice regulations, the old argument of passive vs. active and even a resurgence in the question of which is better Collective Trusts or Mutual Funds. Each one of these could render itself to lively debate on its own. Instead, what we thought we’d do is put together a few different, smaller thoughts, in one place that on their own aren’t enough to make a full discussion. Here goes:

Idea #1: For those of us operating in environments where we are fiduciaries or permitted to act as fiduciaries, a good idea is to create a value statement that acts as a good faith agreement. This idea was cited recently online called a Fiduciary Oath. This type of statement, signed by you and by the client is a great way to cement expectations. Click here to view a sample of what that could look like.

Idea #2: Preaching process and procedure to Plan Sponsors is a great idea. Giving them a process and procedure is a better idea. Performing the process and procedure for them is the best idea. Click here to access a guide to good Plan Sponsor health and a list of best practices from which every plan can benefit.

Idea #3: Little known or discussed, but very important is ERISA §411 which discusses the limitations imposed by the code on who may or may not serve as a fiduciary to an ERISA plan. Most plan sponsors do not routinely perform background checks on providers they hire to perform services to their company, while they do when hiring someone internally. Coaching plan sponsors and providing them a mechanism to ensure that ERISA §411 is adhered to is a value-add service that also helps in cementing the trust relationship. Click here to view a form for this use.