On March 29, 2022, with strong bipartisan support by a vote of 414-5, the U.S. House of Representatives passed the Securing a Strong Retirement Act of 2022[1] (the Act; sometimes referred to as SECURE Act 2.0).

On March 30, 2022, the Act was referred to the Senate for consideration.[2] This article will review selected provisions of the Act that could impact individuals with retirement plan accounts.

As each person’s financial and tax situation is unique, you should talk with your attorney, accountant and other tax and financial advisors before changing your plans based on proposed legislation.

Would the Act change my required beginning date (RBD) for taking distributions from qualified plans and IRAs?

Yes. In most cases under current law, an individual must begin receiving required minimum distributions (RMDs) from the individual’s qualified plans and IRAs by April 1 of the year following the year in which such individual attained age 72 (the RBD).[3] The Act would increase this age to 75 in stages, as follows:

  • If the individual attains age 72 after December 31, 2022 and attains age 73 before January 1, 2030, the individual’s RBD will be April 1 of the year following the year the individual attains age 73.
  • If the individual attains age 73 after December 31, 2029 and attains age 74 before January 1, 2033, the individual’s RBD will be April 1 of the year following the year the individual attains age 74.
  • If the individual attains age 74 after December 31, 2032, the individual’s RBD will be April 1 of the year following the year the individual attains age 75.

These provisions would “apply to distributions required to be made after December 31, 2022, with respect to individuals who attain age 72 after such date.”[4]

Are qualified charitable distributions (QCDs) impacted by the Act?

Under current law, an individual who has attained age 70½ may make QCDs to one or more charitable organizations.[5] A QCD allows an individual to distribute up to $100,000 each year directly from the individual’s IRA to certain qualified charitable organizations (other than a private foundation or donor-advised fund). The amount of the QCD is not included in the individual’s adjusted gross income (AGI) and does not qualify for an income tax charitable deduction. Under current law, after an individual attains age 72, QCDs will count toward fulfilling the individual’s annual RMD.

The Act allows an individual to make a one-time election that allows a “split interest entity” to receive a QCD. The total amount that can be paid into a split interest entity is $50,000. For these purposes, a split interest entity is a charitable remainder annuity trust that is funded exclusively by QCDs, a charitable remainder unitrust that is funded exclusively by QCDs and a charitable gift annuity but only if such annuity is funded by QCDs and begins making fixed payments of 5% or greater to the annuitant not later than one year from the date of funding. Additionally, the remainder beneficiaries of a split interest entity must be qualified charitable organizations which could receive a deductible QCD outright and only the IRA owner, the IRA owner’s spouse or both may hold the income interest in a split interest entity, which interest must not be assignable. Distributions from the split interest entity to the holder of the “income” interest will be treated as ordinary income.[6]

For tax years beginning after 2022, the Act would also increase the maximum amount that qualifies as a QCD for inflation. If the increased amount is not a multiple of $1,000, the maximum amount would be rounded to the nearest $1,000.[7]

Would the Act allow me to save more in my retirement plan?

Many individuals contributing to traditional IRAs can receive an income tax deduction for a contribution to a traditional IRA. For 2022, the maximum amount of the deduction for an individual, without considering the “catch-up contribution” amount is $6,000.[8] For individuals who attain age 50 before the end of the taxable year, current law increases the deductible amount by the “catch-up contribution” amount of $1,000.[9] 

Under current law, the catch-up amount is not indexed for inflation. Beginning after 2023, the Act indexes the catch-up contribution amount for inflation using 2022 as the index year. The indexed amount is rounded down to the nearest multiple of $100.[10]

For employer plans, other than Savings Incentive Match Plan for Employees (SIMPLE) plans, the maximum catch-up contribution amount for 2022 is $6,500.[11] Beginning in 2024, the Act would increase the catch-up amount for such plans for participants who have attained age 62 through age 64 before the end of the tax year to $10,000. For tax years beginning after December 31, 2023, this amount shall be indexed for inflation using the same methodology as the normal catch-up amount, except that the base indexing period shall be the calendar quarter beginning July 1, 2022.[12]

For SIMPLE plans, the maximum catch-up contribution amount for 2022 is $3,000.[13] Beginning in 2024, the Act would increase the catch-up amount for such plans for participants who have attained age 62 through age 64 before the end of the tax year to $5,000. For tax years beginning after December 31, 2023, this amount shall be indexed for inflation using the same methodology as the normal catch-up amount, except that the base indexing period shall be the calendar quarter beginning July 1, 2022.[14]

Are there other amounts that can be added to my retirement plan?

The Act would permit matching contributions to be made by an employer to a defined contribution plan on behalf on an employee with respect to certain qualified student loan payments made by the employee.[15] A qualified student loan payment is a payment made by an employee in repayment of a qualified education loan[16] incurred by the employee to pay higher education expenses, but only if such total payments for the year do not exceed the lesser of (i) the amount allowed for elective deferrals (including catch up contributions) into the plan and (ii) the employee’s compensation for the year, reduced by the employee’s actual elective deferrals made for the year. For 2022 (under current law), the maximum elective deferral amount is $20,500 and the catch-up contribution amount is $6,500.[17] Accordingly, if an employee makes student loan payments instead of fully making elective deferrals to a defined contribution plan, provided the plan meets the statutory requirements, the employer may make matching contributions to the plan with respect to those student loan payments. The employer may rely on the employee’s certification that the employee made the qualified student loan payments.[18]

Similarly, the Act would permit matching contributions to be made by an employer to a SIMPLE plan; provided, however, that the limitations differ from those described above. In the case of a SIMPLE plan, matching contributions with respect to a qualified student loan payment is limited to total payments for the year that do not exceed the lesser of (i) the applicable dollar amount limiting contributions to a SIMPLE plan (including catch up contributions) and (ii) the employee’s compensation for the year, reduced by the employee’s actual elective contributions to the SIMPLE plan for the year.[19] For 2022 (under current law), the maximum elective deferral amount is $14,000 and the catch-up contribution amount is $3,000.[20]

Plans that qualify under Internal Revenue Code (IRC) §§ 403(b) or 457(b) will not fail to qualify under those sections because the employer offers matching contributions on account of qualified student loan payments under that plan, or in the case of a plan that qualifies under IRC § 457(b), another plan maintained by the employer that qualifies under IRC §§ 401(a) or 403(b).[21]

The foregoing provisions shall apply to contributions for plan years beginning after December 31, 2022. The Secretary of the Treasury is directed to provide regulatory guidance. Plan amendments may be necessary to implement matching payments for these purposes.

Can my employer encourage me to contribute to the employer’s qualified plan?

The Act would permit employers to provide a “de minimis financial incentive” to employees for contributing to a plan qualified under IRC § 401(k) or IRC § 403(b). These incentives could be paid in a plan year after the enactment of the Act; however, an employer is not required to provide any incentive for contributing to a qualified retirement plan.[22]

Can my qualified plan use annuities?

Under current law, certain types of annuities have been available for use by qualified plans.[23] The Act expands the types of benefits that can be paid from commercial annuities to include:

(i) annuity payments that increase by a constant percentage, applied not less frequently than annually, at a rate that is less than 5% per year;

(ii) certain lump sum payments (even if the payment period is shortened or the annuity commuted, provided that reasonable actuarial assumptions are used) or that accelerate payments due in the succeeding 12-month period;

(iii) certain distributions in the nature of a dividend; or

(iv) a final payment upon death that does not exceed the excess of the total amount paid for the annuity, less the aggregate amount of prior distributions or payments from or under the contract.[24]

Additionally, the Act could allow more of an employee’s qualified plan account balance to be invested in “longevity annuity contracts”.[25] A qualifying longevity annuity contract (QLAC) is defined by Treasury Regulation and, among other things, is issued by an insurance company for an employee, limits the amount of premiums that can be paid to fund the contract, must commence payments no later than the first day of the month following the employee’s 85th birthday and does not allow for a commutation benefit, surrender right or similar feature.[26] The Act removes the requirement that no more than 25% of the employee’s account be used to pay premiums for QLACs.[27] Notwithstanding the removal of the 25% limitation, the Act does not repeal the dollar limitation with respect to amounts allowed to be used to pay premiums on a QLAC. On any date in 2022, the dollar limitation with respect to amounts paid as premiums for a QLAC is $145,000[28] reduced by the sum of (i) premiums paid before that date with respect to the contract, and (ii) premiums paid on or before that date with respect to any other contract that is intended to be a QLAC and that is purchased for the employee under the plan, or any other qualified retirement plan, annuity, or account (including a traditional IRA).[29]

The Act also facilitates the ability of a divorcing spouse to receive a joint and survivor annuity following a divorce in the case of a QLAC purchased with joint and survivor annuity benefits. The Secretary of the Treasury is directed to amend the appropriate regulations to make this change.[30]

In addition, the Act also directs the Secretary of the Treasury to amend the regulations defining the requirements for a QLAC to allow a 90-day review period within which the employee may cancel the contract.[31]

The Act does not require such a review period to be included in a QLAC, only that its inclusion shall not prevent the contract from qualifying as QLAC.

Still further, the Act also requires the Secretary of the Treasury, within seven years of enactment of the Act, to provide rules that allow exchange-traded funds[32] to establish insurance-dedicated funds in which an owner’s separate account within a variable insurance or variable annuity contract can be invested. The rules with respect to such investments shall apply to segregated account investments made seven or more years after enactment.[33]

Qualified plans allow for penalty-free distributions during employment for certain special reasons, like the adoption of a child or a financial hardship; does the Act impact these?

Qualified birth or adoption distributions:

Unless an exception applies, withdrawals from a retirement plan or IRA before the owner attains age 59½ are subject to a 10% penalty. Effective for distributions after 2019, the SECURE Act[34] provided an exception for penalty-free withdrawals from applicable eligible retirement plans for a qualified birth or adoption distribution. The distribution must be made during the one-year period beginning on the date on which a child of the owner is born or on which the legal adoption by the owner of an eligible adoptee is finalized.

  • An eligible adoptee is any individual (other than a child of the taxpayer’s spouse) who has not attained the age of 18 years or is physically or mentally incapable of self-support.
  • An eligible retirement plan includes an IRA, certain defined contribution plans, and certain annuity contracts (but not defined benefit plans).
  • An individual may withdraw up to $5,000 without penalty with respect to any birth or adoption. Accordingly, a married couple has available up to $10,000 ($5,000 each) penalty-free from their eligible plans and IRAs. Subject to a number of restrictions and rules, distributions can be repaid to an eligible plan or IRA.[35]

The Act amends the SECURE Act by requiring that any amounts from a qualified birth or adoption distribution that the taxpayer desires to re-contribute to an eligible plan or IRA must be repaid within three years from the day after the date on which the distribution was made. This provision would be effective as if originally included in the SECURE Act.[36]

Employee hardship distributions:

Generally, while a qualified plan participant is employed, a qualified plan may not make distributions to the employee unless certain conditions are met. One condition that would allow for a distribution during employment is employee hardship.[37] The regulations provide very specific rules as to what qualifies as a hardship distribution. For example, “a distribution is made on account of hardship only if the distribution both is made on account of an immediate and heavy financial need of the employee and is necessary to satisfy the financial need.”[38] A hardship distribution will be based on all of the facts and circumstances of the employee. The regulations provide a non-exclusive list of expenses that would qualify. Also, the distribution cannot exceed the need, the employee must have exhausted alternative means that are reasonably available, the employee must provide to the plan administrator a representation in writing that he or she has insufficient cash or other liquid assets reasonably available to satisfy the need, and the plan administrator must not have actual knowledge that is contrary to the employee’s representation. When determining whether a distribution is made upon the hardship of an employee the Act provides that “the administrator of the plan may rely on a certification by the employee that the distribution is on account of a financial need of a type that is deemed in regulations …. to be an immediate and heavy financial need and that such distribution is not in excess of the amount required to satisfy such financial need.’’[39] This provision would apply to plan years beginning after December 31, 2022.

Domestic abuse victim distributions:

In addition to qualified birth or adoption and hardship distribution provisions, the Act would permit penalty-free distributions to be made from applicable eligible retirement plans[40] to an employee participant who is a domestic abuse victim.[41] The amount that may be distributed shall not exceed the lesser of $10,000 or 50% of the present value of the employee’s nonforfeitable accrued benefit. Further, the distribution must be made “during the 1-year period beginning on any date on which the employee is a victim of domestic violence by a spouse or domestic partner.” For these purposes,

[t]he term ‘domestic abuse’ means physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.[42]

During the three years after the taxpayer receives such a distribution, the distribution can be repaid to a qualified plan or IRA. For plans that are not IRAs, the aggregate amount repaid may not exceed the aggregate amount of such distribution made from a plan and must be made by individuals that are eligible to make contributions to a plan and to a plan that can receive such contributions. In that case, such distribution is treated as an eligible rollover distribution and then as a direct trustee to trustee transfer within 60 days of the distribution. For IRAs, if the amount is repaid, the original distribution is treated as a distribution that was rolled over within 60 days and as a direct trustee to trustee transfer within 60 days of the distribution.

The Act provides that the plan participant may self-certify that the distribution is an eligible distribution to a domestic abuse victim. 

Further, the Act provides that such distribution qualifies as a distribution that may be made while the participant is employed by the plan provider.[43] These changes would apply to distributions made after the Act is enacted.

It seems like the Act expands benefits and relaxes rules, but are there any other rule changes?

Excise taxes

The Act lowers the excise tax for failing to take a timely RMD from a qualified retirement plan or eligible deferred compensation plan. Under current law, if the payee under such a plan fails to timely take the full RMD for any year, a tax equal to 50% of the amount that should have been taken, but was not, is imposed on the payee.[44] The Act would reduce this tax from 50% to 25% of the RMD that should have been taken but was not. The Act also adds a provision further reducing this tax if the taxpayer takes prompt corrective action. If the taxpayer corrects a shortfall in distributions during the “correction window” and files a return reflecting the penalty tax (as reduced) during that correction window, the tax on the RMD shortfall is reduced to 10% from 25%. The correction window begins on the date on which the tax on a distribution shortfall is imposed and ends on the earlier to occur of (i) the date on which an audit begins regarding or a demand for payment is made for the tax on a distribution shortfall, or (ii) the last day of the second taxable year that begins after the end of the taxable year in which the tax on the distribution shortfall is imposed.[45] These changes would apply to taxable years beginning after December 31, 2022.[46]

The statute of limitations with respect to the assessment of the excise tax for failing to take an RMD[47] or the excise tax on excess contributions[48] generally shall be three years after the taxpayer filed the return for the year in which the act or failure to act occurred. If the taxpayer was not required to file a return, the statute of limitations for collecting such excise taxes shall be three years from the date that a return would have been filed (including extensions) if a return were due.[49]

Prohibited Transactions

Under current law, if an account owner engages in certain prohibited transactions[50] with respect to such owner’s IRA, the entire IRA account ceases to be an individual retirement account as of the first day of such taxable year. The assets of the IRA are deemed to be transferred from the IRA to the owner on the first day of the year, [51] resulting in the value of the entire account being subjected to income tax. The Act would soften this rule by causing only the portion of the IRA account used in the prohibited transaction from qualifying as an IRA and being deemed to be distributed to the individual account owner.[52] This change would be effective for taxable years beginning after the date the Act is enacted.[53]

Inadvertent rule compliance failures

Under current law certain inadvertent rule compliance failures may be corrected under the Employee Plans Compliance Resolution System (EPCRS).[54]For most purposes, “the last day of the correction period is the last day of the third plan year following the plan year for which the failure occurred.”[55] The Act directs that the Revenue Procedure governing the program be deemed amended so that the correction period is indefinite and has no last day (other than with respect to compliance failures identified prior to a self-correction).[56]

The Act directs that inadvertent rule failures regarding loans from a plan to a participant should also be corrected pursuant to the EPCRS, including provisions regarding whether a deemed distribution must be reported on Form 1099-R.[57] The Act also directs that the self-correction program be extended to allow custodians of individual retirement plans[58] to address certain inadvertent failures with respect to an individual retirement plan.[59]

Keeping track of all of my retirement benefits is hard; is there anything to help me do that?

The Act requires the Secretary of Labor, in consultation with the Secretary of the Treasury, to establish an online searchable database, to be managed by the Department of Labor (DoL), known as the Retirement Savings Lost and Found.[60] As its name suggests, one goal of the program is to “allow an individual to search for information that enables the individual to locate the plan administrator of any plans with respect to which the individual is or was a participant or beneficiary, and to provide contact information for the plan administrator….”[61] The Lost and Found will allow the DoL to help the taxpayer do this. The DoL will collect information from plan administrators and may request information from other federal agencies to populate the database.[62]

Under current law, when a plan participant leaves employment, if the participant’s non-forfeitable accrued benefit is $5,000 or less the plan must provide that such accrued benefit be distributed to the participant, subject to the participant’s election to receive the amount or have it distributed to an eligible retirement plan. If the amount is greater than $1,000 and the participant does not elect a specific retirement plan to receive the amount or does not elect receive the amount outright, such accrued benefit shall be transferred to an individual retirement plan of a designated trustee or issuer by the plan administrator who shall notify the participant about the transfer and that the funds may be transferred to another individual retirement plan.[63] The Act increases the $5,000 limit to $7,000.[64]

Do I have to sign up for my employer’s retirement plan?

The Act would require certain 401(k) and certain 403(b) plans to mandate automatic employee contributions to the plan unless the employee affirmatively elects not to contribute to the plan. The amount required to be contributed during the first year of participation must not be less than 3% nor more than 10% of compensation, unless the employee elects not to participate or elects to contribute a different percentage of compensation. On the first day of each plan year after the employee completes a year of participation, the percentage contributed increases by 1%, ultimately increasing to a contribution percentage of at least 10% but not more than 15% of compensation, unless the employee elects not to participate or elects to contribute a different percentage of compensation. For certain plans, however, for plan years ending before 2025, the maximum contribution percentage is reduced from 15% to 10%.

Automatic enrollment shall not apply to SIMPLE plans, to plans established before the date of enactment, to government or church plans, or to plans established by businesses that have been in existence for less than three years or that normally employ 10 or fewer employees. The automatic enrollment rules shall apply to plan years beginning after December 31, 2023.[65]

I work part-time; may I participate in my employer’s plan?

The original SECURE Act required certain 401(k) and 403(b) plans to allow certain part-time employees to contribute to the plan. Generally, a part-time employee must meet certain time in service requirements before the plan is required to allow the employee to contribute. The Act reduces the time in service requirement from three years to two years. For long-term part-time workers the eligibility period began in 2021, so that these workers would be first eligible to participate on January 1, 2023.[66]

Are there incentives for creating retirement plans?

Certain business owners who sell shares of a corporation taxed under IRC subchapter C to an employee stock ownership plan (ESOP) that owns at least 30% of the C corporation’s stock after the sale can defer recognition of capital gain from the sale. Non-recognition is available by making an election and investing in qualified replacement property within a certain window of time.[67] Currently, this benefit is limited to sales of C corporation shares. The Act would expand this benefit to allow shareholders of corporations taxed under IRC subchapter S limited deferral of gain from the sale of their shares to an ESOP. The rules for qualifying for gain deferral would remain the same, however, sellers of S corporation shares would be eligible to make a non-recognition election with respect to 10% “of the amount realized on such sale for purposes of determining the amount of gain not recognized and the extent to which (if at all) the amount realized on such sale exceeds the cost of qualified replacement property.”[68]

The Act also would expand the credit for small employer pension plan startup costs.[69]

What happens next?

The Act seems to have broad bipartisan support, as evidenced by the vote in the House of Representatives. The bill has been referred to the Senate. Such bipartisan support indicates that the bill may be enacted by Congress and signed into law.

Nevertheless, it is important to remember that the legislative process can be long and amendments to the Act as proposed are possible. 

Before changing your plans based on any proposed legislation, you should talk with your legal, tax and financial advisors. For more information, please contact your PNC Private Bank advisor.