SECURE Act 2.0: Automatic Enrollment in Retirement Plans

In March 2022 in a vote of 441 to 5, the House overwhelmingly approved SECURE Act 2.0, a new-and-improved version of the original SECURE bill passed into law in December of 2019.

SECURE Act 2.0 includes a new mandatory requirement for automatic enrollment and an increase in catch-up contributions. It also features several benefits that can greatly aid employees. To better understand these changes and benefits, let’s take a closer look.

What Is the Purpose of SECURE Act 2.0?

The SECURE (Setting Every Community Up for Retirement Enhancement) Act was a bill that became law in December of 2019, making it easier for smaller businesses and companies to set up less expensive retirement options that are easier to administer for their employees. SECURE Act 2.0 builds on this first Act with a few significant changes to 401(k)s and other contribution retirement plans.

Changes in SECURE Act 2.0

A few distinct changes were made in the new SECURE Act 2.0, though it’s still rooted in the ideals laid out in the first bill, the SECURE Act. Two of the biggest changes the new law has instituted include mandatory automatic enrollment and increased contribution limits, but several other changes can impact your retirement plan and options as well.

Mandatorizing Automatic Enrollment

This new iteration of the SECURE Act requires employers that establish new defined contribution plans to enroll their newly hired employees automatically, providing the individuals are eligible to receive those benefits. The pretax contribution level for this plan levels out at three percent of the employee’s salary and increases one percent annually up to at least ten percent, but not exceeding fifteen percent. Additionally, employees may affirmatively elect a different contribution if they so choose.

If participants fail to make investment elections, their contributions default into a QDIA (Qualified Default Investment Alternative) which is generally either a target date, balanced fund, or managed account.

And while automatic enrollment for new hires was heavily encouraged in the past, it has not been mandated until the passing of SECURE Act 2.0 to help more individuals take advantage of their 401(k)s.

Increasing Catch-Up Contributions

With catch-up contributions, SECURE Act 2.0 maintains existing 401(k) and 403(b) plan catch-up contribution limits for those individuals who are fifty years old. However, for participants who are sixty-two through sixty-four years old, that limit increases to an annual $10,000 starting in 2024. The current limit on catch-up contributions for individuals who are fifty is $6,500 with a total limit of $27,000.

It’s important to note that the newer higher limit will be indexed for inflation annually, as the current contributions already are.

Roth Matching Contributions

Under laws currently in action, employer matching contributions must be paid directly into employees’ pretax 401(k) accounts, but this is not the case for the new SECURE Act 2.0 guidelines. Starting in 2023, plan sponsors now have the option of letting their employees choose their matching contributions and have them treated as Roth contributions for 401(k) plans instead, and these employer-matched contributions won’t be excluded from the employee’s gross taxable income.

Delaying Mandatory Distributions

Participants in employer-sponsored defined contribution plans and more traditional individual retirement accounts have been required to take their required minimum distributions (RMDs) when they reach the age of seventy-two under the old SECURE Act requirements. With the new policy, that number increases to seventy-three in 2023, seventy-four in 2030, and seventy-five in 2033. This lets employees have more opportunities to focus on their Roth conversions even after they retire to lessen the impact of their corresponding additional taxes.

Expediting Part-Time Worker’s

Participation

While the original SECURE Act increased eligibility for long-term part-time employees to contribute to their 401(k) retirement plans, the new SECURE Act 2.0 works to expedite that process among eligible participants by shortening the eligibility measurement period. This allows qualifying part-timers to begin contributing more significantly to their retirement far earlier than previous legislation allowed.

Permitting Student Loan Matching

Under the new SECURE Act, employers have a statutory basis for matching their employee’s student loan payments to their 401(k)s in place of traditional contribution matching. The IRS has previously allowed such contributions to occur, however, there was no legal basis for it until now. It’s important to note that the matching contributions put forward by the company must vest under the same schedule as other matching contributions.