Major Changes Could Be Coming to 401(k) Plans in 2022

A variety of retirement savings plans exist in the U.S. While many are available to everyone, some can only be accessed through your employer. An example is the 401(k), an employer-sponsored pension plan that not all companies offer. It has grown to become the most popular workplace retirement savings plan. If you're preparing your taxes and have a 401(k) plan, you might be wondering what changes are coming to 401(k) in 2022.

401(k), introduced into U.S. tax code in 1978, is an employer-sponsored defined-contribution plan. These plans encourage you to save more by offering tax incentives. In a traditional 401(k), you make tax-free contributions to the fund, meaning the contributions are deducted from your paycheck before taxes are paid on that income.

Contribution limits to 401(k) usually get adjusted from year to year, depending on inflation. With inflation near multidecade highs, 401(k) contribution limits have been raised. In 2021, you could contribute a maximum of $19,500 to a traditional 401(k), and this limit now been raised to $20,500. (For people aged 50 and over, “catch-up” contributions of an additional $6,500 were allowed in 2021, and this has stayed the same.)

Many employers match employees’ 401(k) contributions. Whereas the IRS doesn’t control the amount an employer can contribute, it does set a limit for total contributions by employers and employees. For the 2022 tax year, this limit will be $61,000, a rise of $3,000 from 2021. For workers aged 50 and above, the total limit rose to $67,500 in 2022 from $64,500 in 2021.

In 2019, one of the most important pieces of retirement legislation was signed into law by the then-president Donald Trump. The bill, the SECURE (Setting Every Community Up for Retirement Enhancement) Act, removed maximum age limits on retirement contributions, provided tax credits to small businesses offering employees 401(k) plans, and extended retirement benefits to some long-term, part-time employees.

On March 29, Congress almost unanimously passed another bill, SECURE 2.0. The changes proposed by this bill are even broader than those proposed by SECURE. All attention is now on the Senate to pass this bill.

One of the biggest changes proposed in SECURE 2.0 is the automatic enrolment of all eligible workers into 401(k) plans at a savings rate of 3 percent of their salary. Workers will, however, have the option to opt out or change their contribution after enrolment. If the participant doesn’t opt out, the contribution will be raised by 1 percentage point each year until it reaches 10 percent. The change was proposed based on a study that found that auto-enrolment increases worker participation in plans.

Another big change would be increasing annual catch-up contribution limits for people between 62 and 64 years old, to $10,000 from $6,500. Also, SECURE 2.0 aims to raise the minimum age at which people must begin withdrawing money from their accounts each year, to 75 from 72. That gives them three additional years of tax-free growth on their retirement investments.

Finally, people who have student loans often forego saving for retirement to pay off their student loans, and SECURE 2.0 would introduce changes to reflect that. Employers could treat student loan repayments as elective retirement account deferrals, and provide a matching contribution to their 401(k). So, if you pay off $1,000 in student loan debt, it would be the same as putting $1,000 into a retirement plan, as far as matching goes.