The SECURE Act 2.0 of 2022 (“SECURE 2.0”) became law as part of the Consolidated Appropriations Act of 2023. SECURE 2.0 builds on previous legislation–Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”), signed into law in December 2019, to improve retirement savings opportunities for workers.
SECURE 2.0 is nearly 400 pages in length with the goal of strengthening the retirement system by getting people to save more for retirement, improving the rules and lowering the cost to employers. Some changes are technical, and some are significant improvements that have been requested for a long time.
While plan amendments generally don’t need to be made until the end of the first plan year beginning on or after January 1, 2025, plans must be operated in accordance with the effective date of each new provision.
Key Provision Highlights
Mandatory auto enrollment
New 401(k) and 403(b) plans must automatically enroll participants in the plans when they become eligible (employees may opt out). The initial automatic enrollment amount is at least 3% but not more than 10%; each year thereafter that amount is increased by 1% until it reaches at least 10% but not more than 15%. This requirement becomes effective for plan years beginning after December 31, 2024.
Note: There is an exception to this requirement for small businesses with 10 or fewer employees, new businesses (those that have been in business for less than three years), church plans and governmental plans.
Increased catch up provisions
Secure 2.0 increases the catch-up contribution limit for retirement plans to the greater of $10,000 or 50% more than the regular catch-up amount applicable in 2025 for individuals who between the ages of 60 and 63 before the close of the taxable year (current limit on catch-up contributions to a retirement plan is $7,500.) The increased limits take effect for taxable years beginning after December 31, 2024 and are indexed for inflation after 2025.
Caveat: For employees with compensation of $145,000 or more in the prior calendar year, all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars.
Changes for RMD’s
- Starting in 2023, the penalty for failing to take an RMD will decrease from 50% to 25% of the RMD amount not taken. The penalty will be reduced from 25% to 10% for IRA owners if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.
- Roth accounts in employer retirement plans will be exempt from the RMD requirements starting in 2024.
- Beginning immediately, for in-plan annuity payments that exceed the participant’s RMD amount, the excess annuity payment can be applied to the following year’s RMD.
Employer matching or nonelective contributions for Roth accounts
Effective immediately, plan sponsors can provide participants with the option of receiving matching contributions and nonelective contributions on a Roth basis.
Increased credits for small employer pension plan startup costs
Beginning in 2023, the startup credit increases from 50% to 100% for employers with 50 or fewer employees and a new credit is created that is based on the amount of money contributed to participant accounts.
Treatment of student loan payments as elective deferrals
Beginning in 2024, employers can make matching contributions based on employees’ qualified student loan payments. The Act requires employees who receive such matching contributions to certify annually to the employer that such payment has been made on a loan.
Withdrawals for certain emergency expenses
Beginning in 2024, a participant may make a withdrawal of up to $1,000 per year for certain emergency expenses, which are unforeseeable or immediate family needs relating to personal or family emergency expenses. Only one distribution is permitted each year, and a taxpayer can repay the distribution within three years. No further emergency distributions are permissible during the three-year repayment period unless repayment occurs.
Automatic portability transactions
For transactions occurring 12 months or more after the date of enactment, Secure 2.0 permits a retirement plan service provider, subject to several conditions, to provide a plan with automatic portability services. These services would include the automatic transfer of a plan participant’s default IRA into the retirement plan of the participant’s new employer.
Improving coverage for part-time workers
SECURE 2.0 builds on the SECURE Act requirement that employer sponsored plans allow longterm part-time workers to participate. Rather than needing to complete three years of service with at least 500 hours worked, employees need only complete two years of such service. This also applies to 403(b) plans that are subject to ERISA. This section is effective for plan years beginning after Dec. 31, 2024.
Saver’s Match replaces Saver’s Credit
Current law allows for a nonrefundable credit (Saver’s Credit) for certain individuals who make contributions to IRAs and employer retirement plans. Secure 2.0 changes the Saver’s Credit from a credit paid in cash as part of a tax refund into a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan. The amount of the match is 50% of IRA or retirement plan contributions, up to $2,000 per individual. The match is subject to an income-based phase out and becomes effective for tax years beginning after 2026.
529 Plan rollovers
After 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. Rollovers cannot exceed the aggregate before the 5-year period ending on the date of the distribution. The rollover is treated as a contribution towards the annual Roth IRA contribution limit.
Simplification and Clarification of Retirement Plan Rules
There are some simplification and clarification of rules that are worthy of noting:
- Retirement plan fiduciaries now have the discretion to decide not to recoup overpayments mistakenly made to retirees.
- Retirement savings lost and found – a national online searchable “lost and found” database for U.S.-based retirement plans will be created.
- Updating dollar limit for mandatory distributions from $5,000 to $7,000, effective for distributions made after 2023.
- Expansion of Employee Plans Compliance Resolution System - expanding the types of errors that can be self corrected.
- For hardship withdrawals, under certain circumstances employees are permitted to self-certify that they have experienced an event that qualifies as a financial hardship.
- Exception to penalty on early distributions from qualified plans for individuals with a terminal illness or on small amounts in certain cases of domestic abuse or on distributions up to $2,500 for long term care premiums
This is a high level overview of Secure 2.0. To read the full text go to: https://www.congress.gov/bill/117thcongress/
Consideration will need to be given to how changes will impact you as a plan sponsor, various effective dates, participant education on updates and plan amendments needed. If you have questions or would like further clarification, contact Shannon & Associates for help.