As expected, Congress has passed legislation, which the President has signed, that will have far-reaching implications for retirement plan savings plans.
A grouping of retirement plan provisions in the Setting Every Community Up for Retirement Enhancement, commonly called the SECURE 2.0 Act of 2022 (SECURE 2.0), are included in the 2023 Consolidated Appropriations Act (also known as the Omnibus Bill). SECURE 2.0 is comprehensive legislation intended to expand and increase retirement savings, especially for low-income and part-time employees, and to simplify and clarify many complex and confusing existing retirement plan rules. It builds on the SECURE Act of 2019 (SECURE Act), which increased the age of required minimum distributions (RMDs) and eliminated age requirements for traditional IRA contributions.
The SECURE Act 2.0 expands automatic enrollment programs to help small employers sponsor plans for employees, and enhances certain credits to make saving for retirement more beneficial to both individuals and plan sponsors. It also improves individual investment options, streamlines plan administration, and makes significant changes to required minimum distributions (also known as RMDs).
These changes give taxpayers more flexibility in how they use qualified retirement savings and avoid excise taxes for early withdrawals in certain cases.
Key provisions in SECURE 2.0
Mandatory Automatic Enrollment
Effective for plan years beginning after December 31, 2024, new 401(k) and 403(b) plans must automatically enroll employees when eligible. Automatic deferrals start at between 3% and 10% of compensation, increasing by 1% each year, to a maximum of at least 10%, but no more than 15% of compensation.
Starter 401(k)/403(b) Plans for Employers with No Retirement Plan
Creates a “starter” 401(k) deferral-only arrangement with no employer contributions permitted. Also creates a similar plan for not-for-profit organizations called a 403(b) safe harbor deferral only plan.
Increased Age for Required Minimum Distributions (RMDs)
Increases the age for RMDs to 73, beginning on January 1, 2023, and to age 75 on January 1, 2033, for certain individuals. In addition, it reduces or entirely eliminates the excise tax imposed for not taking RMDs.
Increase in Catch-Up Contribution Limits
For those aged 50 or older, the retirement plan “catch-up “contribution limit is increased. For 2023, the catch-up contribution amount is limited to $7,500 for most retirement plans and is subject to inflation increases.
SECURE 2.0 provides a second increase in the contribution amount for those aged 60, 61, 62 or 63, effective for tax years after 2024. For most plans, this “second” catch-up limitation is $10,000 and $5,000 for SIMPLE plans. Like the “standard” catch-up amounts, these limitations are subject to inflation adjustments.
The annual limit on contributions to individual retirement accounts (IRAs) is also increased for participants aged 50 and older. The “catch-up” limit for IRAs is $1,000. Unlike the catch-up amount for other plans, this amount is not subject to increases for inflation under current law. The bill would make the IRA catch-up amount adjusted annually for inflation for tax years beginning after 2023.
Finally, for tax years beginning after 2023, all catch-up contributions are subject to Roth (i.e., after-tax) rules, rather than only where allowed by the plan in which the individual participates.
Penalty-Free Emergency Withdrawals
Penalty-free distributions are allowed for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses” up to $1,000. Only one distribution may be made every three years or one per year if the distribution is repaid within three years. Penalty-free withdrawals are also allowed for small amounts for individuals who need the funds in cases of domestic abuse or terminal illness.
Employer Matching of Student Loan Repayments
Effective for plan years beginning after December 31, 2023, employers can match student loan repayments as if the student loan repayments were deferrals.
Automatic Rollovers Rules
Currently, plans may automatically distribute small accounts of less than $5,000 to former participants. If the distribution is greater than $1,000, the plan must roll the account into an IRA. Effective 12 months from enactment, SECURE 2.0 permits the transfer of default IRAs into the participant’s new employer’s plan, unless the participant affirmatively elects otherwise. SECURE 2.0 also increases the limit for automatic rollovers from $5,000 to $7,000.
Long-Term, Part-Time Workers Qualify More Easily
Under current law, employees with at least 1,000 hours of service in a 12-month period or 500 service hours in a three-consecutive-year period must be eligible to participate in the employer’s qualified retirement plan. SECURE 2.0 reduces that three-year rule to two years for plan years beginning after December 31, 2024.
Emergency Savings Account Deferrals Allowed
If the retirement plan allows, non-highly compensated employees can defer up to the lesser of 3% of compensation or $2,500 (post-tax) to an emergency savings account.
Diminimus Incentives For Participation Are Allowed
Employers may offer diminimus financial incentives, such as low-dollar gift cards, to boost participation in retirement plans. The financial incentives cannot be purchased with plan assets.
Database to Locate Missing Participants and Funds Is Created
SECURE 2.0 creates a national online searchable database to enable employers to locate “missing” plan participants, and plan individuals to locate retirement funds.
In summary, SECURE 2.0 is a comprehensive attempt to increase retirement savings and access to 401(k) and individual retirement accounts and savings, particularly for low- and middle-income workers, and those with significant student debt. It is also intended to increase the number of small businesses offering retirement plans to their workers and provide access to others who don’t yet have long-term retirement accounts.
If you have any questions about the impact of SECURE 2.0, please reach out to Bill Barks, Director of our Retirement Plan Services group, at at (317) 613-7867 or email him at [email protected].