Skip to main content

SECURE Act 2.0 – How This Affects You and Your Retirement Plan

by

After two years of discussion, SECURE Act 2.0 of 2022 was passed on Friday, December 29, 2022.  It is the most impactful retirement legislation in the past 15 years, and it received bipartisan support to help Americans save more for retirement. The legislation has many provisions, some which will take effect soon, while others will take effect in the future. Below is a summary of the key provisions.

CHANGES APPLICABLE TO INDIVIDUALS:

PROVISIONS EFFECTIVE IN 2023:

  • Further Delay Required Minimum Distributions – While SECURE Act 1.0 delayed RMDs from beginning at age 70 ½ to 72 in 2019, SECURE Act 2.0 further delays RMDs over the next decade. Beginning in 2023, RMDs will be delayed to age 73 (for those turning 72 after 12/31/2022). Beginning in 2033, RMDs will be delayed to age 75. This will allow those who can afford to leave their retirement funds untouched to grow their funds longer.
  • Choice to Receive Employer Contributions as Roth – This is an optional provision that plans can adopt which permits employees the choice to receive their employer contribution on a pre-tax or Roth basis. Previously, all employer contributions were made on a pre-tax basis. If elected, the amount of the employer contribution would be included in an employee’s gross income. No changes will be made to the tax deductibility of employer contributions. This gives employees more control over the taxable status of their account and allows the government to recognize taxable income in the current year.

PROVISIONS EFFECTIVE IN 2024:

  • Catch-up Contributions Must Be Roth – Previously, catch-up contributions could be pre-tax or Roth at all income levels. Going forward, catch-up contributions must be made on a Roth basis if the employee made $145k+ (indexed to inflation) for the prior year. This only applies to retirement plans, not IRAs. This will implicitly require plans to permit Roth contributions if they don’t already and allows the government to recognize taxable income.
  • Index IRA Contribution Catch-up Limit – Currently, the catch-up limit on IRA contributions for those aged 50 and older is limited to $1,000 and is not indexed to inflation. This legislation allows the IRA Catch-up Limit to increase annually with inflation in $100 increments.
  • Ability to Skip Roth Retirement Plan RMDs – Currently, Required Minimum Distributions (RMDs) are required from all retirement accounts, both pre-tax and Roth. This differs from Individual Retirement Accounts (IRAs) where RMDs are only required from pre-tax IRAs. This legislation aligns the rules between these accounts and permits skipping RMDs on Roth retirement accounts. Since that money has already been taxed, there’s no benefit to the IRS to force its distribution.
  • 529 Rollovers to Roth IRAs – This new provision allows individuals to roll up to $35,000 over the course of their lifetime from 529 Plan accounts, which provide tax benefits for college savings, to Roth IRAs for the designated beneficiary. This applies to accounts that have been in existence for at least 15 years or more and rollovers are subject to Roth IRA annual contribution limits. This could help encourage parents to save more for their children’s education without fear of incurring a 10% penalty if all the funds are not used.

PROVISIONS APPLICABLE IN 2025:

  • New Tier of Catch-up Contributions – Currently, any individual age 50 or older can contribute an additional $7,500 “catch-up” contribution to their retirement plan. Beginning in 2025, that provision will remain for individuals aged 50-59, but individuals aged 60-63 will have a new tier of catch-up contribution that is 50% higher (ex: would be $11,250 if permitted this year). This allows individuals closest to retirement an opportunity to save even more! For ages 64+, catch-up levels return to the traditional level of $7,500.
  • Establishment of Retirement Savings Lost and Found – This section creates a national database to help Americans locate old retirement plans. It is to be created no later than two years after the date of the enactment. Many individuals lose track of old retirement plans over time, especially if they have had several different jobs during their career.

PROVISIONS EFFECTIVE IN 2027:

  • “Savers Credit” Becomes “Savers Match” – Low-income participants are currently eligible for a credit up to $1,000 (or $2,000 if married filing jointly) if they make a retirement plan or IRA contribution. However, this credit is rarely used since it is non-refundable, meaning it can reduce your taxes to $0, but won’t provide a tax refund. Under SECURE Act 2.0, the government will change the credit to a “match” of 50% up to $2,000 ($1,000 annually) into the retirement accounts of eligible workers, regardless of if they have a tax liability.

CHANGES APPLICABLE TO RETIREMENT PLANS:

PROVISIONS EFFECTIVE IN 2023:

  • Increased Tax Credits for New Plans – Under SECURE Act 1.0, small businesses with 50 employees or less that chose to start a retirement plan received a tax credit equal to 50% of administrative costs, capped annually at $5,000. Under SECURE Act 2.0, the 50% credit is increased to 100% credit of administrative costs, meaning that companies don’t have to incur the same amount of expense to receive the same credit. Separately, the bill provides an additional credit of up to $1,000 per employee (that makes less than $100k) equal to the applicable percentage of eligible employer contributions for 5 years. This can help offset the cost of the match for employers.
  • Incentives to Save – An employer can provide small financial incentives (like gift cards) to encourage retirement savings, which does not need to be included in an employee’s compensation. The statute does not include any guidance on what constitutes a “de minimis financial incentive” requiring further guidance from the IRS.
  • Employee Certification for Hardships – Plan administrators may rely on employee certification for hardship distributions. This can reduce the employer’s liability of approving distributions that don’t qualify and increase administrative ease.

PROVISIONS EFFECTIVE IN 2024:

  • Student Loan Matching –This optional provision would permit companies to provide a “match” in the retirement plan for the amounts that employees are currently paying towards student loans. The plan may test employees who receive matching contributions on loan repayments separately for non-discrimination testing purposes. Many Americans are not currently saving for retirement because they are paying back student loans, and they are therefore not receiving employer retirement contributions that they could have otherwise obtained. This will allow those participants to begin building their retirement savings sooner.
  • Emergency (“Side Car”) Savings – This optional provision would permit employers to allow non-highly compensated executive (NHCE) participants to save up to $2,500 in a Roth-like account for rainy day situations. Plans can impose lower limits if desired. Contributions are included in determining employer matches. Participants can be auto enrolled up to 3% of salary. Any additional employee or employer contributions beyond $2,500 can be invested in retirement savings or stopped once that threshold is met. When distributions are needed, participants will not incur the 10% early withdrawal penalty or taxes that are common in retirement plans. This could help participants build an emergency savings fund and prevent them from dipping into their retirement savings early, losing money to taxes and penalties.
  • Withdrawals for Emergencies – This provision permits penalty-free early withdrawal distributions of up to $1,000 per year for emergency expenses, which are defined as unforeseeable or immediate financial needs. Only one distribution is permitted each year and employees have the opportunity to repay the distribution within 3 years. No further distributions are allowed during the repayment period unless they are repaid in full.
  • Starter K – A new type of retirement plan intended for small businesses called a “Starter K” will be created. Employee contributions are subject to annual IRA limits and employer contributions are not required. In exchange, they have a safe harbor for the non-discrimination testing and top-heavy testing that is required for retirement plans.
  • Increased Cash-Out Limit – This raises the threshold that allows plan sponsors to cash out or rollover the balances of terminated employees from $5,000 to $7,000. This can encourage participants to rollover their old balance to their new employer and simplify plan administration.
  • SIMPLE To Safe-Harbor – Employers can replace their SIMPLE IRA with a Safe Harbor retirement plan during the year. Previously, this was only permitted at year-end, which will be more convenient for companies looking to make this change.

PROVISIONS EFFECTIVE IN 2025:

  • Required Automatic Enrollment for New Plans – Newly created retirement plans will be required to automatically enroll participants between 3-10% of pay and automatically escalate contributions by 1% each year until it reaches 10-15% of pay. Participants have 90 days to un-enroll. All current plans as of 2022 will be grandfathered, but any plans created in 2023 or later must add these features by 2025. Additional exemptions apply to SIMPLE, governmental or church plans, and those businesses in existence less than 3 years or those with 10 or fewer employees. Traditionally, to participate in a retirement plan, participants must “opt in”. Automatic enrollment is a behavioral finance concept that enrolls employees in the retirement plan but gives them the opportunity to “opt out”. Most studies show that few participants choose to opt-out, which can increase participation rates and help employees build their savings sooner.

PROVISIONS EFFECTIVE IN 2026:

  • Benefit Statements – For defined contribution plans, only one benefit statement must be provided annually in paper. The other three quarterly statements may be provided electronically (unless the participant elects otherwise).