Congress 401k Plan Changes: Legislative Updates and Implications

The recent changes to the Congress 401k plan have left many employees wondering what these updates mean for their retirement savings. The Consolidated Appropriations Act of 2021, passed in December 2020, made significant changes to the plan.

One of the key changes is the elimination of the "catch-up" contribution age limit. This means that employees aged 50 and above can now contribute an additional $6,500 to their 401k plan each year.

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With the new Congress 401(k) plan changes, employers now have more flexibility when it comes to making contributions to their employees' retirement plans.

One option is to make employer contributions into a Roth account, which was previously not possible. Now, employees can choose to have their employer contributions made into the Roth account, if offered by their employer.

This means that the money will count as earned income and incur taxes now, but qualified distributions in retirement will be tax-free, similar to a Roth IRA.

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A new tax credit is also available for small employers who establish a new retirement plan, such as a SEP or SIMPLE plan. The startup tax credit increases from 50% to 100% of the costs of starting a retirement plan, up to a maximum amount of $5,000.

In addition, there is a tax credit for the first five years of a qualified new plan, up to $1,000 per employee, specifically for SEP employer startup contributions.

However, there is some ambiguity in the language of Section 102, which may limit the additional credit for employer contributions to the $5,000 dollar limit. Fortunately, a recent bipartisan Congressional letter clarifies that Congress intended the new credit for employer contributions to be in addition to the startup credit.

Employers who join a Multiple Employer Plan (MEP) are also shielded from liability for potential misconduct perpetrated by other employers who are in the same plan.

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Automatic 401(k) enrollment is changing the game for retirement savings. As of Jan. 1, 2025, employers will automatically enroll new employees in a retirement savings plan, and existing employees will be auto-enrolled if they're not currently participating.

Most employers must follow these new regulations, but there are exceptions for church plans, government plans, and small businesses with 10 or fewer employees. This change is aimed at getting more people into retirement savings plans from the start.

The initial contribution must be at least 3% of pretax earnings but not more than 10%. This is the starting point for employees who are automatically enrolled.

Following the initial year, the employee's contribution will increase by 1% annually until it hits 10% to 15%. This means that over time, employees will be saving more for their retirement.

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Catch-up contributions allow people age 50 and older to contribute additional money to retirement plans. As of 2025, catch-up contribution limits to retirement plans such as 401(k)s for those on the cusp of retirement — ages 60 to 63 — will increase from $7,500 per year to $11,250.

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However, there's a catch: a technical drafting error in the Secure 2.0 Act may disallow catch-up contributions to pre-tax or Roth accounts starting in 2024. This error specifically comes from section 603, which tried to align SECURE 2.0 to the IRC.

The catch-up contribution limit for SIMPLE IRAs is $3,500 in 2024 and 2025, though people with certain plans may be able to contribute up to $3,850. The newly introduced catch-up contribution for those ages 60 to 63 will be $5,250.

Congress did not intend to disallow catch-up contributions, but a drafting error may still cause problems. It's unclear whether Treasury has the regulatory authority to ignore this error in the interim.

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Plan administration just got a whole lot easier for employers. With the SECURE Act, unrelated small employers can now join together to establish a shared 401(k) plan, known as a Multiple Employer Plan (MEP).

This allows small businesses to pool resources and mitigate the administrative expenses of establishing a plan. MEPs existed prior to the SECURE Act, but under the previous law they were required to be related in some way.

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The law also shields employers who join a Multiple Employer Plan from liability for potential misconduct perpetrated by other employers who are in the same plan. This added protection gives employers more peace of mind when participating in a MEP.

Here are some key benefits of Multiple Employer Plans:

Creating a database to locate missing participants and funds is a game-changer for plan administration. SECURE 2.0 makes this possible with a national online searchable database.

This database allows employers to find missing plan participants and plan individuals to locate their retirement funds. It's a win-win for everyone involved.

The database is a key component of SECURE 2.0's efforts to increase retirement savings and access to 401(k) and individual retirement accounts.

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As an employer, you're likely looking for ways to make your 401(k) plan more attractive and easier for employees to use. One key provision of the SECURE 2.0 law is the creation of Multiple Employer Plans (MEPs), which allow unrelated small employers to join together and share the costs of establishing a plan.

MEPs offer several benefits, including reduced administrative expenses and increased access to retirement plans for employees. Under the SECURE 2.0 law, MEPs are no longer required to be related in some way, such as through geography or industry.

The law also shields employers who join a MEP from liability for misconduct perpetrated by other employers in the same plan. This can help reduce the risk for employers who participate in a MEP.

Employers who offer annuities as part of their defined-contribution retirement plans are now shielded from liability under a new safe-harbor provision, as long as they meet specific regulatory requirements.

To qualify for the tax credit for defraying plan startup costs, employers must have no more than 100 employees who received at least $5,000 of compensation from the employer in the preceding year.

Here are the details of the tax credits available to small employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment:

Employers who participate in a MEP with automatic enrollment can claim a separate tax credit for each eligible employer.

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With the new changes to 401(k) plans, you now have more options to consider. You can choose to have your employer contributions made into a Roth account, which means the money will count as earned income and incur taxes now, but qualified distributions in retirement will be tax-free.

This option is made possible by Section 604 of Secure 2.0, which allows employees to choose where their employer contributions go. If your employer offers a Roth 401(k), you can opt to have your contributions made into the Roth account.

If you're an employer looking to make your plans easier and more affordable, you may want to consider the key provisions under consideration in the current versions of the Securing a Strong Retirement Act (SSRA), Enhancing American Retirement Now Act (EARN), and Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Act (RISE & SHINE).

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With Secure 2.0, Roth account options have expanded to include employer contributions. Now, employees can choose to have their employer contributions made into a Roth account, if offered by their employer.

This means that the money will count as earned income and incur taxes now, but qualified distributions in retirement will be tax-free.

Secure 2.0 also allowed Roth contributions to SIMPLE IRA plans, which previously only permitted tax-deductible contributions. This change means taxes are paid upfront on contributions, and qualified withdrawals later on are tax-free.

You can now allocate either your or your employer's contributions on a Roth basis with a SEP plan, rather than pretax.

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Defined-contribution plans are a popular option for employers looking to make retirement planning easier and more affordable for their employees.

Several key provisions are under consideration to be included in the final legislation affecting defined contribution plans. These provisions include making plans more secure and enhancing retirement savings.

Employers can expect to see changes to how defined contribution plans are administered and managed. The Securing a Strong Retirement Act (SSRA) and the Enhancing American Retirement Now Act (EARN) are two bills under consideration in Congress that aim to improve defined contribution plans.

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Here are some of the key bills under consideration in Congress that affect defined contribution plans:

The SECURE Act made significant changes to retirement plans, and now we're seeing more updates with SECURE 2.0. One key change is the automatic rollover rule, which has increased the limit for automatic rollovers from $5,000 to $7,000.

The SECURE Act was introduced by Representative Richard Neal and passed in 2019, making it a law that was signed by President Donald Trump. The Act contains provisions to incentivize retirement planning and increase access to tax-advantaged savings programs.

SECURE 2.0 has introduced new tax credits for businesses that establish a new retirement plan, including a startup tax credit of up to $5,000 and an additional credit for employer contributions of up to $1,000 per employee. However, there's some ambiguity in the language of section 102, which may impact the additional credit for employer contributions.

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The SECURE Act also introduced provisions to make retirement plans more accessible and affordable for employers, including the creation of Pooled Employer Plans (PEPs) and the expansion of tax credits for small employers. These changes are expected to make it easier for small businesses to offer retirement plans to their employees.

Here are some key dates to keep in mind:

It's worth noting that the SECURE Act and SECURE 2.0 have made significant changes to retirement planning, and it's essential for employers and employees to understand these changes to make the most of their retirement savings options.

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