SECURE 2.0 Act Overview and Retirement Planning Changes

In order to increase accessibility to retirement accounts and flexibility after joining a retirement plan, Congress, as part of the Consolidated Appropriations Act of 2022, passed the Securing a Strong Retirement Act of 2022 (“SECURE 2.0 Act”), which was signed into law December 29, 2022. The SECURE 2.0 Act builds upon the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and has more than 90 changes affecting qualified retirement plans, IRAs, SIMPLEs, SEPs, ABLEs, and Section 529 Plans. These changes impact individuals and employers as well as retirement plan administrators. All parties need to understand the provisions of the SECURE 2.0 Act, whether they are required or optional, and the date each change becomes effective, in order to manage company retirement plans as well as each individual’s retirement portfolio.

This article provides a very high-level summary of the major provisions of the SECURE 2.0 Act including those impacting eligibility, contributions, distributions, new plan features, and corrections.

401(k) Automatic Enrollment with Automatic Escalation

Effective January 1, 2025, the SECURE 2.0 Act, in hopes of expanding participation, will generally require new 401(k) and 403(b) plans to automatically enroll eligible participants into retirement plans. Employers of new plans will be required to enroll eligible participants at deferral rates of between 3% and 10%. Participants will then be able to elect not to participate in the plan if they so choose, and a refund of any amounts withheld from their pay can be returned within 90 days. Each year after automatic enrollment, the deferral rate increases by 1% until it reaches at least 10%, but not more than 15%. It is important to note that all plans already established as of the date of enactment, December 29, 2022, are grandfathered and do not have to implement automatic enrollment or escalation.

Catch-Up Contributions

Effective January 1, 2024, the SECURE 2.0 Act requires employees who make catch-up contributions and whose wages exceed $145,000, to make them on an after-tax basis. Employees whose wages are equal to or less than $145,000 are allowed to make catch-up contributions on a pre-tax or after-tax basis. Therefore, in any retirement plan that only offers pre-tax contributions, participants with wages over $145,000 will not be allowed to make catch-up contributions.

Effective January 1, 2025, the SECURE 2.0 Act increases the catchup-up contribution to the greater of $10,000 or 50% more than the regular catch-up amount if a participant is between 60 and 63 years of age.

Employer Contributions as Roth Contributions

Prior to the enactment of the SECURE 2.0 Act, plan sponsors were not permitted to make employer matching contributions in their 401(k), 403(b), or governmental 457(b) plans on a Roth basis. The SECURE 2.0 Act allows employers to now make contributions as Roth contributions. For employer contributions elected to be taken as a Roth contribution, the employee pays taxes at the time the contribution is made and then no tax will be owed by the employee when the funds are withdrawn.

Student Loans and 401(k) Matching Contributions

Effective January 1, 2024, the SECURE 2.0 Act allows employers to make matching contributions to your retirement plan based on an individual’s student loan payments so long as they vest under the same schedule as other matching contributions. Additionally, student loan repayments are considered to be elective deferrals when calculating employer matching contributions but are not considered to be employee contributions for nondiscrimination testing. Employees receiving these matching contributions will have to certify annually to the employer that the loan payments have been made.

Part-Time Employees Service Requirements

Typically, plans allow those who work 1,000 hours of service in a given year to participate in their retirement plan. In an effort to expand plan eligibility, the SECURE Act required that employers track the service of “long term part-time employees,” those working 500 or more hours for a period of three years (beginning in 2021) and permit them to enroll in their 401(k) plan. This would allow those that qualify to enter their employer’s plan in 2024. The SECURE 2.0 Act reduces the service time requirement for part-time employees from three years to two years before they are allowed to participate in their organizations’ retirement plan. The SECURE 2.0 Act also disregards service prior to 2021, thus those that qualify will still enter their employer’s plan in 2024. Plan sponsors are not required to make matching contributions on elective deferrals for these individuals. Starting in 2025, this provision extends the “long term part-time employees” coverage to ERISA covered 403(b) plans.

Establish In-Plan Emergency Savings Accounts

For plan years beginning after December 31, 2023, the SECURE 2.0 Act allows employers the option to offer their non-highly compensated employees the ability to create an emergency savings account within their 401(k) or 403(b) plan. Employers can even automatically enroll participants into these accounts at a deferral percentage not to exceed 3%. There is a cap on this of $2,500, at which time future deferrals can be stopped or deposited into a Roth account within the plan until their balance falls below the $2,500. Participants can make up to four withdrawals a year without incurring fees.

Saver’s Match

Current law allows for a nonrefundable “Saver’s Credit” for certain individuals who make contributions to IRAs and employer retirement plans. The credit is paid in cash as part of an individual’s tax refund. Effective beginning January 1, 2027, the SECURE 2.0 Act establishes a saver’s match that will replace the Saver’s Credit. The saver’s match will be a federal matching contribution to an individual’s retirement plan. The contribution will be 50% of IRA or retirement plan contributions up to $2,000 per individual or $4,000 per couple. There are income limitations of $35,500 for an individual, $53,250 as a head of household, and $71,000 as a married couple.

Gift Cards

Effective January 1, 2023, the SECURE 2.0 Act allows employers to distribute small financial incentives to employees to encourage them to contribute to their retirement plans. The incentives may not be paid from plan assets. Previously, the law prohibited employers from providing financial incentive for employees to participate in the company’s retirement plan, other than the employer providing matching contributions to the plan.

Required Minimum Distributions (RMD)

Effective January 1, 2020, the SECURE Act increased the age in which RMD’s must be taken from 70.5 to 72. The SECURE 2.0 Act increased the age to 73 in 2023 and further increased it to age 75 starting in 2033. The penalty for failure to take a RMD decreased from 50% to 25% of the amount the distribution was underpaid. Additionally, effective in 2024, qualified Roth plans are no longer required to take RMD’s.

Roth Plan Distribution Rules

Currently, RMD’s are not required to begin prior to the death of the owner of a Roth IRA. However, pre-death distributions are required in the case of the owner of a Roth designated account in an employer retirement plan such as a 401(k) plan. The SECURE 2.0 Act eliminated the pre-death distribution requirement for Roth accounts in employer plans, effective for taxable years beginning after December 31, 2023.

Hardship Withdrawals

Effective January 1, 2023, the SECURE 2.0 Act allows plan sponsors to rely upon certification from participants of the retirement plan that they have experienced a situation that qualifies as a hardship in order to take a withdrawal from their retirement account. However, the SECURE 2.0 Act does not state that employers are required to maintain appropriate documentation of the event. Therefore, plan sponsors should consider if they have a need for maintaining this documentation for potential IRS or retirement plan audits. Additionally, for plan years beginning after December 31, 2023, 403(b) plans may also allow for hardship distributions using the same rules as 401(k) plans.

Emergency 401(k) and 403(b) Withdrawals

Effective January 1, 2024, the SECURE 2.0 Act allows an emergency withdrawal of up to $1,000 to be taken once during the calendar year without being subject to the 10% early distribution penalty. It may be repaid by the participant. However, if repayment is not made within a specified timeframe, additional emergency withdrawals will not be allowed for a period of three years.

Withdrawals for Victims of Domestic Abuse and Terminal Illnesses

The SECURE 2.0 Act allows plans to permit participants who self-certify that they are victims of domestic abuse to take a withdrawal up to the lesser of $10,000 (indexed for inflation) or 50% of the participant’s account. This is effective for distributions made after December 31, 2023, and the withdrawal is not subject to the 10% tax penalty on early withdrawals. Beginning just after enactment, a participant with a terminal illness may also take a distribution without the 10% tax penalty but must provide documentation of the illness as evidence. Both types of withdrawals allow for participants to repay the amount to the plan within three years.

Mandatory Distributions

Many plans have a provision such that if an account balance of a terminated employee doesn’t exceed $1,000, they can simply send them a check without the participant requesting a withdrawal. For amounts between $1,000 and $5,000 the employer may set up an IRA for this participant and roll the money into it without tax consequences to the employee. Effective with enactment, employers may choose to roll money out of their plan into the terminated participant’s new employer’s plan if their balance does not exceed $5,000. The change was made in an effort to consolidate accounts of participants who have terminated and may not remember they have money in a 401(k) of a previous employer when they retire. For distributions made after December 31, 2023, the limit may increase to $7,000 if the employer chooses.

Creation of National Database

The SECURE 2.0 Act promises to have a national database tracked by the Department of Labor created by January 1, 2025, to store details of retirement benefits that may have been lost or forgotten about. This will help employers ready to distribute benefits to participants in which the employer may not have updated contact information and also help participants identify accounts or funds in which they had forgotten existed.

Recouping Overpayments

Even for the most diligent plan administrators, non-compliance happens and sometimes it is in the form of an overpayment to a participant or beneficiary. Pre-SECURE 2.0 Act the correction for this type of error was to have the participant repay the amount to the plan and if it weren’t possible, the employer would have to contribute it to the plan. Effective with enactment, the SECURE 2.0 Act allows employers to decide not to recoup this overpayment.

Startup Credit for New Plans

For small employers who had not set up retirement plans due to cost concerns, the SECURE Act provided tax incentives to set up new plans for employers with 100 employees. The employer could receive a 3-year credit for up to 50% of administrative costs it paid associated with starting a plan up to $5,000 per year. The SECURE 2.0 Act increased the startup credit from 50% to 100% for employers with up to 50 employees up to a per employee cap of $1,000. This phases out over a 5-year period. It is effective for the 2023 tax year.

The above details are not a complete list of all terms to be implemented by the SECURE 2.0 Act but serves as an opportunity for administrators and participants of benefit plans to introduce themselves to the provisions that will be most widely affected by the changes. As the law is very recently enacted, clarifications and best practices will likely follow, so make sure to look for updates and have discussions with your provider as you are planning your implementation process.

As many provisions of the SECURE 2.0 Act are already effective, retirement plan administrators and individual retirement savers should review these terms and carefully plan out the best actions for administering your retirement plans for your participants or managing your own retirement plan accounts, respectively. A thoughtful, swift response by plan administrators helps to ensure that your retirement plan remains compliant with the new requirements of the SECURE 2.0 Act and are allowed to efficiently implement the change management process that will be required. Likewise, a thoughtful, swift response will allow an individual retirement plan saver to receive the most optimal results that the SECURE 2.0 Act was intended to provide for retirement plan participants.

If LBMC can help as providers and third-party administrators are grappling with the implementation of this large piece of legislation, please reach out to us by filling out the Contact Us form on our website.