Secure 2.0 doesn’t do enough to help savers—here’s how to fix it

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Secure Act 2.0 was supposed to improve retirement security for all Americans, writ large. But that’s not the case, according to Albert Feuer, an employer benefits attorney.

Sure, the new law provides tax breaks to small businesses that offer retirement plans to their employees. And that provision could go a long way toward helping the 45% or so of workers who don’t have access to an employer-sponsored retirement plan start saving for retirement. (Of course, whether those employees will get a good deal is up for debate.

Read: Small businesses are ‘paying double’ for 401(k) plans.

Secure 2.0 also lets employers add money to their employees’ retirement savings accounts, such as a 401(k), 403(b), or governmental 457(b), if the employee is also paying off their student loans. And there is a provision—the Saver’s Match — designed to encourage low-income individuals to save for retirement.

But in the main, most of the 92 provisions in the new law “do not help workers struggling to accumulate adequate retirement savings,” Feuer recently wrote. “Instead, they direct more tax incentives to those with more than adequate retirement savings. Thus, they significantly diminish retirement equity.”

Read An Opportunity to Redesign the Secure Act 2.0 and Secure Act 2.0: A Missed Opportunity to Enhance Retirement Equity.  

“I have a very simple principle,” he said in an interview. “If we’re giving tax incentives and that’s what we have—retirement tax incentives—we should be doing that for a reason. Now, what is the reason we should give retirement tax incentives? Well, we want to make it easier for people to retire. There are a lot of people already not having very much trouble retiring, but there are tens of millions of people who are working very hard, having difficulty surviving day to day. And they’re certainly having difficulty saving for their retirement…So the question you should ask is: ‘Is this (Secure Act 2.0) making it more equitable?’ Are we helping the people who really need help or are we giving the money (the retirement tax incentives) to the people who don’t need help?”

Given that, Feuer believes retirement equity — the presumed goal of retirement tax incentives — would be better achieved by four amendments, two of which we will cover here, to redesign the Secure Act 2.0.

Eliminate the Roth catch-up mandate and catch-up limit increases

Currently, individuals who are 50 or older can make catch-up contributions to their pretax or Roth 401(k), 403(b), or governmental 457(b) accounts, but not to their SIMPLE IRAs.

However, beginning in 2024, Secure 2.0 will require individuals who earned more than $145,000 in wages or earnings that are subject to the Federal Insurance Contributions Act (FICA) taxes in the previous year (adjusted for inflation) and have access to a Roth option in their plan to make catch-up contributions to a Roth plan account. 

Secure Act 2.0 does not, however, answer the question of what happens if the plan does not offer Roth accounts, according to Sarah Brenner, director of retirement education at Ed Slott and Company.

One possibility, she said, is the plan must begin offering Roth accounts to accommodate the mandatory treatment of catch-ups. Or, it may be that the plan can continue not to offer Roth accounts, but in that case, it could not offer catch-ups for anyone. Or, she said, maybe the “required Roth catch-up” could simply be directed to the pretax portion of the plan when there is no Roth plan option, she said. “This is one of the many unanswered questions of Secure Act 2.0.” 

Under Secure 2.0, individuals aged 60-63 will be able to make higher catch-up contributions to their retirement accounts in 2024. The catch-up limit will be the greater of $10,000 or 150% of the regular catch-up contribution amount, and will be adjusted for inflation.

Beginning in 2025, participants in Simple IRA plans who are aged 60-63 will also be able to make higher catch-up contributions, which will be the greater of $5,000 or 150% of the Simple IRA catch-up contribution amount for 2025, adjusted for inflation.

According to Feuer, the Roth catch-up mandate and the increase in the catch-up limits for participants between ages 60 and 63 should be eliminated for several reasons: to improve retirement equity; to avoid adding considerable complexity to the catch-up decision for plan administrators and participants; and to avoid significant federal revenue reductions.

Feuer argues that these provisions are problematic because they disregard the fact that few plan participants who make catch-up contributions lack substantial retirement savings.

“Who makes catch-up contributions?” he asked. “People over 50 years old who can at least contribute $22,500 (to their 401(k)). That’s a lot of money…for the overwhelming majority of Americans.” 

According to the Employee Benefit Research Institute, only about 18% of those saving for retirement make a catch-up contribution. And the people making catch-up contributions are not those who have difficulty saving; they would be saving anyway, he said. 

Read the research: Secure Act 2.0: A Missed Opportunity to Enhance Retirement Equity

Of note, elective deferrals are not treated as catch-up contributions until they exceed the limit of $22,500 in 2023, according to the IRS. The annual catch-up contributions up to $7,500 in 2023 may be permitted by these plans: 401(k) (other than a SIMPLE 401(k)); 403(b); SARSEP; and governmental 457(b). The annual catch-up contribution will increase to $10,000 per year (indexed for inflation) starting in 2025 for participants aged 60 to 63.

Feuer suggests that a far better provision would focus on expanding access to retirement savings for low- and middle-income earners, who are more likely to be struggling to save for retirement. Or, another option would be to give some more money to the people who really need it: a matching contribution to low-income workers.

Eliminate both RMD age increases

Secure Act 2.0 also increases the required minimum distribution (RMD) age, which is the age at which you must start taking required withdrawals from your retirement accounts, from 72 in 2022 to 73 in 2023, and to 75 in 2033. The rationale for this change was to extend the time that individuals keep their retirement savings invested and growing. What’s more, the change reflects how life expectancy has risen since 1974 when the original RMD age was 70½. According to the Social Security Administration, the life expectancy of a 65-year-old in the U.S. in 1974 was 17.1 years. In 2023, the life expectancy of a 65-year-old in the U.S. is 20.9 years. By pushing back the RMD, retirement account owners also have a better chance of managing the risk of longevity; the risk of outliving their assets. 

This increase to age 73 and then 75 is problematic, according to Feuer, because it disproportionately benefits retirees who can already afford to pay their retirement expenses without depleting their retirement savings. “People, when they are 70½, if they are not taking money out at that time, they probably don’t need it for their retirement,” he said.

Given that, the RMD age increase is unlikely to have a significant impact on the retirement savings of most people. But it could make it more difficult for some people to make ends meet in retirement.

Thus, he said, the Secure Act 2.0’s increases in the RMD age, like the 2019 Secure Act increase in the RMD age from 70½ to 72, foster more retirement inequity, and he believes the RMD age should be 70½, which was in place for almost 60 years, but certainly no more than 72.

He notes, for instance, that the biggest and most successful retirement plan we have is Social Security. “And what does Social Security do? It basically says: ‘You get the maximum benefit at age 70, not 72, not 73, not 75.’”

And the reason lawmakers chose age 70, according to Feuer, is this: “Seventy was supposed to be older than when most people retired,” he said. “It was supposed to be giving a little bit of safety.”

That’s why he says there’s no reason to go beyond age 70 as the RMD age. “I know realistically I’m not going to get it to go back to 70½. So, I say, ‘Let’s try and go back to 72 or at least get at least stop at 73.’” 

Eliminating the Secure Act 2.0’s RMD age increases, as well as its catch-up provisions, would improve the Secure Act 2.0’s retirement equity and diminish its long-term revenue shortfalls, he believes.

“Financial advisers recommend that clients adopt various approaches to defer taxation because deferring taxes like deferring any payment obligation generally results in a financial advantage,” said Feuer. “Thus, increasing the RMD when we know those who don’t need the tax advantaged savings for retirement expenses will increase tax deferrals and the cost to the American taxpayers in general.”

Of course, to fully measure the cost of such measures you need to consider when the taxes will be paid, he said. “The Roth rules which allow one to prepay taxes at a large discount are so pernicious because most estimates don’t take into account that the contributor is allowed to avoid the tax not only on the amount contributed but on the earnings on those contributions,” he said. “In contrast, non-Roth after tax contributions to retirement plans merely defer the tax on the earnings for those contributions.”

Improve compliance with retirement plan rules

Though it’s a bit in the weeds for the average worker saving for retirement, Feuer also wants to require employee retirement benefit plans and individual retirement plans to give the IRS annual notices of their use, if any, of the self-correction program (SCP) under the IRS’s Employee Plans Compliance Resolution System (EPCRS). Under Secure ACT 2.0, the SCP requires no notice of the correction to the IRS. And Feuer wants to amend the law so that the IRS could monitor the effectiveness of the SCP program and would reduce the long-term revenue shortfalls resulting from taxpayers otherwise retaining retirement tax incentives to which they are not entitled. 

According to Feuer, it is difficult to estimate what the revenue losses are from employer retirement plans and individual retirement plan sponsors failing to follow the qualification rules. “However, one would expect the level of noncompliance to increase if SCPs are more widely permitted unless there is a significant increase in plan audits which would require significantly more IRS resources be devoted to such efforts,” he said.

One can, however, get an idea of what the IRS considers the most serious/common tax qualification errors by looking at Fix-It Guides – Common Problems, Real Solutions. That guide describes many cases in which participants fail to obtain the benefits set forth under the plan terms, such as the failure to include employees or provide sufficient contributions. “The compliance problem is not merely undeserved tax benefits but workers deprived of promised benefits,” said Feuer.

Expand excise tax to apply to the earnings associated with any delayed RMD

Under the current rules, if someone takes less than the required minimum distribution (RMD) from their retirement plan, they are hit with a 50% penalty tax. However, under the proposed Secure 2.0 legislation, the penalty tax would be reduced to 25%. If the shortfall is corrected during the “correction Window,” the penalty would be further reduced to 10%. These changes are expected to go into effect in 2023.

“The IRS only requires you to take the money out,” he said. “They don’t require you to take the earnings out. So you get a windfall under the way the IRS policy is right now. So that’s not nice for those of us who want to have windfalls.” 

Given that, Feuer says the excise tax should apply to both the late RMDs and the earnings associated with them. Adding this amendment, he says, is necessary for a retirement plan to maintain its tax qualification and for individuals seeking a waiver of the excise taxes that would otherwise be assessed on them. “There are things we can do to make this fair in perception,” he said.

Plus, he said, the changes are intended to reduce revenue shortfalls resulting from taxpayers receiving tax incentives they are not entitled to.

Admittedly, Feuer’s proposed amendments don’t necessarily help workers struggling to accumulate adequate retirement savings. But what they do is this: “They prevent us from making it even more unequal,” he said.

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