The dust is still settling from the enactment of the SECURE 2.0 Act at the end of December.
The SECURE 2.0 Act is a massive bill comprising 92 provisions in 358 pages of dense legislative text. The retirement policy portion of tax law—residing mainly in the “400s” sections of the Internal Revenue Code—has a notorious amount of cross-references that could easily (and did in a few cases in the SECURE 2.0 Act) lead to technical trip-ups that will require corrections.
The American Retirement Association has identified a much-needed fix to one of our signature legislative initiatives and ultimate successes in the SECURE 2.0 Act—the Starter 401(k) plan.
We were thrilled when Congress chose to include the Starter 401(k) plan—a brand new super simple retirement plan—in the SECURE 2.0 Act.
We worked diligently to get that provision put forward in Congress, first as standalone bipartisan, bicameral legislation called the Starter-K Act of 2022 (H.R. 8125/S. 3955), which then was included in the Senate Finance Committee’s Enhancing American Retirement Now (EARN) Act (S. 4808).
So, what is the Starter 401(k) plan?
It’s a new wage deferral-only safe harbor 401(k) plan. The plan allows employees to save up to $6,000 per year (with a $1,000 catch-up contribution) in a tax-preferred retirement account (more on this later) but does not involve the administrative burden or expense of a traditional 401(k) plan. For example, the Starter 401(k) plan does not require employer contributions or complicated testing.
The primary purpose of the Starter 401(k) plan is to create a 401(k) product similar to the auto-IRA products now being put forward by over a dozen states. It will allow employers that have to adopt a plan in those states to choose a private sector 401(k) provider to meet the retirement plan coverage requirement embedded in these laws.
By the way, more and more states adopt these types of auto-IRA laws with a retirement plan coverage requirement every year, so the Starter 401(k) plan will become even more critical over time.
The Starter 401(k) plan will have an impact. We estimate that the Starter 401(k) plan—coupled with the new SECURE 2.0 employer retirement plan startup tax credit—will enable 19 million additional American workers to access and participate in the workplace-based retirement system. This new coverage initiative will disproportionately benefit workers in minority communities.
We estimate a 22% increase in Black and Hispanic American worker access to retirement plans resulting from these new SECURE 2.0 policies.
So, what's the problem?
The issue is the Starter 401(k) contribution limit should equal the IRA contribution limit. Indeed, that was the intent of the Senate Finance Committee when they included the Starter 401(k) plan in the EARN Act. Hence, the Starter 401(k) contribution limit included first in the EARN Act and then in the SECURE 2.0 Act is $6,000, which is equal to the 2022 IRA contribution limit. However, the SECURE 2.0 Act delayed the effective date of the Starter 401(k) plan until 2024.
Meanwhile, the IRA contribution limit will increase due to inflation. The 2023 IRA contribution limit is already $6,500 and will likely be even higher in 2024. The Starter 401(k) plan product now mistakenly will have a lower contribution limit and will thus be put at a disadvantage vis-à-vis an auto-IRA product.
We have confirmed that this was not intended. So now we have further work to do to get the Starter 401(k) contribution limit increased to match the 2024 IRA contribution limit and then indexed to inflation going forward, hopefully before these products come online next year.
As the saying goes, no good deed goes unpunished. Stay tuned for further developments as we work to get this change made.
Andrew Remo is the American Retirement Association's Director of Federal & State Legislative Affairs.