Full steam ahead for Safe Act 2.0?
In March 2021, we “wrote about”Five Major Safe Act 2.0 Provisions,, Good News! The bill, HR 2954 – Securing a Strong Retirement Act, 2021, passed the House by a vote of 414 – 5 on March 29, 2022 and is now awaiting approval by the Senate.
Senate version of SECURE Act 2.0, S.1770 – Retirement Security and Savings Act 2021, There has been no movement since it was introduced on May 2021. however, it contains provisions that overlap with some of those in the House’s version. In addition, both the House and Senate versions share the primary goals of expanding coverage, increasing retirement savings for Americans, and making it easier for employers, participants, and other stakeholders to understand the governing rules. that should make it easier HR 2954 To get Senate approval.
As we wait, let’s look at some of the provisions not covered in my article “Five Major Safe Act 2.0 Provisions,
Allow Employer Contributions to Roth 401(k) Accounts
Under current law, employer matching contributions cannot be made directly into designated Roth accounts (DRAs). DRAs are Roth 401(k)s, Roth 403(b)s and government Roth 457(b) accounts. Instead, matching contributions can only be made to traditional pre-tax accounts under 401(k), 403(b) and government 457(b) plans. The SAFE Act 2.0 will allow employers to amend their plans to allow employees to choose whether to make matching contributions to their traditional accounts or their DRAs.
It is unclear how these matching contributions will be treated for tax purposes. Under current tax law, matching contributions are excluded from an employee’s income until they are distributed. It is my opinion that any matching contributions made to Roth accounts will be included in the employee’s income when making sure those amounts are included in the income for the employee – similarly named Roth contributions are treated. goes.
Currently, an employee can transfer employer matching contributions to his DRA as an in-plan Roth rollover (conversion). The amounts in the DRA will benefit from tax-deferred growth, and the income grows tax-free if eligible. The in-plan conversion will be treated as taxable income to the employee.
Protection for overpaid employees
It is not uncommon for employees to receive overpayments when they receive withdrawals from employer plans such as 401(k)s and pension plans. If IRAs are rolled over, these overpayments must be distributed as a refund of the excess contribution and will be subject to a 6% excise duty if not corrected in time. The 6% excise tax will apply to the balance in the IRA each year.
Plan administrators are required to recoup these excess payments, as well as interest. These repayments often follow years of overpayments, causing financial hardship for employees—many of whom are retirees living on fixed income.
The SAFE Act 2.0 will allow plan administrators to decide not to offset overpayments made to retirees. Limits and protections will apply to protect innocent retirees when plan administrators choose to recover overpayments. Further, the rollover of overpayment will remain valid and hence will not be subject to rectification as refund of excess contribution.
Extensive Investment Options for 403(b) Plans
One of the disadvantages of 403(b) plans is that investments are generally limited to annuity contracts and mutual funds. This prevents 403(b) participants from diversifying their investments and sometimes causes them to pay higher investment-related fees than qualified plans like 401(k) plans. Secure Act 2.0 will allow 403(b) custodial accounts to invest in collective investment trusts and amend securities laws to treat 403(b) plans like qualified plans with respect to their ability to invest in collective investment trusts . Other conditions will apply, including the 403(b) plan, which will be subject to the Employees’ Retirement Income Security Act.
Secure Act 2.0 includes a number of other positive features, some of which encourage small businesses to offer retirement plans to their employees by helping them defray start-up administrative costs. These will be beneficial to employees, as small businesses employ the majority of American workers, and many of these avoid adopting retirement plans for their employees for a variety of reasons, including the cost of setting up a small business plan.
We will keep you posted on any developments.