You may remember the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, which introduced changes that aimed to make it easier for businesses to offer retirement plans and for workers to save for retirement. In December of 2022, its revamped and refreshed counterpart, SECURE Act 2.0, was signed into law. This exciting legislation includes around 100 provisions that are designed to impact and strengthen the retirement landscape for American employers and employees. In this post, we're highlighting 10 key provisions that you should be aware of:
The age requirement to begin taking RMDs will increase from age 72 to age 73 starting on January 1, 2023, and then to age 75 on January 1, 2033. In addition, the penalty for not taking an RMD is reduced from the current 50%, to 25%, and in some cases to 10% if the failure is corrected timely. In addition, beginning in 2024, the pre-death required minimum distribution requirement for Roth 401(k) accounts will be eliminated. Also in 2024, surviving spouses can elect to be treated as the deceased employee for purposes of RMDs.
In 2023, participants age 50 and older can contribute an extra $7,500 per year annually into their 401(k) account. This amount will increase to $10,000 per year starting in 2025 for participants age 60 to 63. Additionally, catch-up provisions will be indexed for inflation. Lastly, effective January 1, 2024, all catch-up contributions for participants earning more than $145,000 will be subject to Roth treatment.
Prior to SECURE 2.0, plan sponsors could not provide either employer matching contributions or non-elective contributions in their 401(k), 403(b) and governmental 457(b) plans on a Roth basis. Plan sponsors were required to make these contributions on a pre-tax basis only. The new law now authorizes defined contribution plan sponsors to provide participants with the option of receiving matching contributions and non-elective contributions on a Roth basis. Employees are still able to elect matching contributions be made on a pre-tax basis if preferred.
Beginning in 2024, student loan payments could count as retirement contributions for the purpose of qualifying for matching contributions in a workplace retirement account. This means employers will be able to make contributions to their company retirement plan on behalf of employees who are paying student loans instead of saving for retirement. For nondiscrimination testing purposes the plan may test separately employees who receive matching contributions on loan repayments.
Having an emergency savings account for short-term and unexpected expenses is one of the first steps we encourage people to take on their savings journey. Under the new law, companies may allow their employees to add an emergency savings account that is a designated Roth account and eligible to accept participant contributions for non-highly compensated employees starting in 2024. Can be funded through automatic payroll deductions up to 3%, and contributions would be capped at $2,500 (or lower, as set by the employer) and the first 4 withdrawals in a year would be tax- and penalty-free. In addition, plan participants generally will be able to withdraw up to $1,000 per year from their retirement savings account for emergency expenses (unforeseeable or immediate financial need) without having to pay the 10% tax penalty for early withdrawal if they’re under the age of 59½.
Enhancing/replacing the current Saver’s Credit, the Saver’s Match will begin in 2027. Employees will be eligible for a federal matching contribution of up to $2,000 per year that must be deposited into their retirement savings account. The match phases out based on income and tax-filing status.
Beginning in 2024, beneficiaries of 529 college savings accounts are permitted to rollover unused dollars (up to $35,000) over their lifetime from their 529 account to a Roth IRA tax- and penalty-free under certain conditions. Subject to Roth IRA annual limits and the 529 account must have been open for more than 15 years.
Employers who start new retirement plans will be required to automatically enroll employees in their retirement plan at a rate of at least 3% but not more than 10%, beginning in 2025. Excluded from this requirement are SIMPLE, government or church plans, plans sponsored by new companies in business for less than 3 years and businesses with 10 or fewer employees.
In an effort to make starting a retirement plan more affordable for small employers, the tax credit for small employers to start a new plan has been increased from 50% of startup costs to 100% per year for 3 years for employers with 50 or fewer employees. An additional credit offsets up to $1,000 of employer contributions per employee in the first year, phased down gradually over 5 years. These credits would be available to eligible employers if they adopt an existing plan (like a MEP or PEP). Effective taxable years after December 31, 2022.
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