Here’s why we think so.
Since the passage of ERISA in 1974, retirement plan legislation has been a series of technical and tax-related changes. The Revenue Act of 1978 started out the same way with its focus on:
- Increasing economic growth through income tax reductions to stimulate consumer and investment spending, and
- Improving equity in the tax system and simplifying it.
Sometimes during the legislative process an unrelated provision is added to the law. That’s what happened here. Section 401(k) found its way into the Internal Revenue Code. In one fell swoop, this new Code Section replaced what was then the primary employee retirement saving vehicle, “After-Tax Thrift Plans”, which were retirement savings plans to which employees made contributions on an after-tax basis.
This new Section 401(k) allowed employees to make those contributions on a pre-tax basis. It also provided a comfort level to employees that their accounts would not be locked up until the traditional age 65 retirement age. It also permitted access to those funds with in-service distributions at age 59½, upon severance from employment, or because of hardship or disability.
SECURE 2.0 which Congress passed 46 years later went significantly further. Passed at the tail end of 2022 as an extension of the 2019 SECURE Act, there were 92 provisions in approximately 400 pages with four major themes: had four major objectives:
- Expanding participant coverage.
- Encouraging retirement savings.
- Helping participants preserve income.
- Simplifying retirement plan rules and administrative procedures.
SECURE 2.0 is also different for two other reasons.
First, there are optional and mandatory provisions. A plan sponsor can adopt the optional ones, or not, based on the plan’s objectives. The mandatory provisions, on the other hand, must be timely adopted by plan amendments to maintain the plan’s tax qualification.
Second, the effective dates of the various provisions are staggered. Provisions are effective in 2023, 2024, 2025, and beyond. These staggered effective dates provide breathing room for the IRS to provide guidance, for the retirement plan industry to make the necessary changes to administrative systems and documents, and for plan sponsors to make the best decisions for their retirement plans.
With that in mind, we’ll be unpacking the new law in a series of blog posts called the SECURE 2.0 Series. We’ll be starting with a leading edge topic: the participation of long-term part-time employees in 401(k) plans. Please stay tuned.