SECURE 2.0 Act Highlights
SECURE 2.0 Act of 2022 was signed into law on December 29, 2022. This builds on the SECURE Act passed in 2019 with more than 90 changes affecting retirement plans, 529 plans, IRAs and Simple IRAs. The SECURE Act 2.0 document is more than 400 pages long. Below are some of the major highlights.
We will be providing more information as we learn about the implementation of the provisions with the retirement plan providers and third-party administrators (TPA’s).
Starting in 2023:
Individuals starting in 2023:
- IRA, 401(k), and 403(b) limits increased:
- IRA: $6,500 plus additional $1,000 if over 50,
- 401(k) & 403(b): $22,500 plus additional $7,500 if over 50.
- SIMPLE IRA’s: $15,500 plus additional $$3,500 if over 50/
- Required minimum distribution age change:
- Born before 1950: no changes (age 72)
- Born 1951-1959: age 73
- Born after 1960: age 75
- Relaxed RMD Rules: Excise tax penalty for missed RMDs reduced to 25% from 50%. Reduced to 10% if you receive all past missed RMD’s, file taxes before receiving notice and completed within in 2 years of the missed RMD.
Retirement Plans starting 2023:
- Roth Option available for employer contributions (401(k), 403(b) & SIMPLE IRA): Allows participant to choose to have company match or non-elective contribution made to Roth. Plans must have a Roth provision in the plan.
- SIMPLE IRA & SEP IRA: Will now allow a Roth deferral & contribution. Previous was just pre-tax.
- De Minimis Financial Incentive Permitted: Employers may provide a de minimis financial incentive (not from plan assets) to encourage participants to contribute to the plan. Ex. Low-dollar gift card.
- Expansion of new start up plan credits: New plan tax credits will increase from 50% to 100% per year for 3 years. The maximum credit is $5,000 per year for employers with 50 or few employees. In addition, 100% of employer contributions to employees earning less than $100,000 a year. Credit up to $1,000 per employee and phases down over 5 years.
- Reduced Notice Obligation for Unenrolled Participants: A 401(k)/403(b) plan does not violate ERISA if it fails to provide annual disclosure notices to individuals who are eligible but not enrolled in the plan. Plans are required to provide a summary plan description, notices required at initial eligibility, and annual reminder notice about their eligibility.
- Hardship reporting rules clarified: Hardship withdrawals clarified to rely on employee certification as to the event and amount needed for withdrawal.
- Flexibility in withdrawal provision without penalty: Three year pay-back period.
- Family emergencies, medical, personal. $1,000
- Victim of domestic abuse. Lesser of $10k or 50% of account balance.
- Participants who are terminally ill.
- Federal disasters $22k withdrawal within 180 days.
- Loans related to federal disasters increased to $100k or 100% of vested balance.
Starting in 2024:
Individuals, starting in 2024:
- No mandatory RMDs from Roth 401k balances. Required minimum distributions will no longer be required from 401(k) balances (similar to Roth IRAs) during a participant’s lifetime. Rules for RMD upon death still apply.
- Required Roth treatment for catch -up contributions: Catch-up contributions (over 50 years old) in 401(k)/403(b) plans if earning over $145,000 per year MUST be contributed to Roth.
Tax and Penalty-free rollovers from 529 plans to Roth IRAs (contributions after 2023). 529 money can be transferred to a Roth IRA for the current beneficiary. 529 must be in place for 15 years, contributions in the last 5 years don’t qualify, annual limits apply, lifetime amount is $35,000.
Retirement plans starting in 2024:
- Required Roth treatment for catch -up contributions: Catch up contributions (over 50 years old) for participants earning over $145,000 per year MUST be contributed to Roth.
- Emergency Roth savings accounts and emergency withdrawals (optional): Plans may offer a savings account related to the plan. Employees may contribute up to $2,500 per year on a Roth basis. Must be invested in a capital preservation account (money market/stable value). If the company makes a match, contributions must be at the same rate to the saving accounts. Upon termination – transferred to Roth account or distributed.
- Student loan payment match (optional): Employers with 401(k)/403(b) or Simple IRAs will have the option to match student loan payments rather to the plan. Certain higher education loan repayments will apply. Loan payments are not included in the plan’s average deferral testing.
- Allow plans to adopt a higher mandatory cash out (optional): Current mandatory force out of a plan is $5,000 or less. A plan may adopt a higher amount, increasing to $7,000.
- Mandatory participation of part-time employees: Long-term part time employees will be required to be included in a plan – complete 500 hours in each of the three consecutive years. Starting in 2025: 500 hours in last two years. Participants are not included in discrimination testing or employer contributions.
- Simple IRA Enhancements:
- Plan and catch-up limits adjusted for inflation ($15,500 & $3,500 for 2023) are increasing 10% for employers with 25 or fewer employees, employers with 26-100 employees qualify for the higher limits only if they provide a dollar for dollar match up to 4% of compensation or a 3% non-elective employer contribution (up from current 3% match or 2% non-elective).
- Additional Contribution amounts: Currently employers are required and limited to make a 2% contribution to eligible employees or a matching contribution of 3%.
The new rule allows additional contributions (uniform across all employees) up to the lesser of 10% of compensation or $5,000.
- SIMPLE IRA may be replaced mid-year with 401(k) safe harbor plan: Current rule is that SIMPLE IRA plans may not be replaced mid-year. New rule will permit SIMPLE IRA be replaced by a safe harbor 401(k) mid-year. In addition, the requirement to be in place for at least two years before rolling over to a 401(k) will be waived.
Starter 401(k) and 403(b): Permits employers to start a deferral only 40(k) or safe harbor 403(b) (non-profits only). Plans would auto-enroll employees 3-15% of their pay. The annual deferral limits will be the IRA contribution limits with catch up. ($6500/$1000).
Starting in 2025 & later:
Individuals starting in 2025:
- For those contributing to a company retirement plan – catch-up amounts increase: The catch-up maximum for plan participants is $7,500 for 2023 ($3,500 for Simple IRAs) and adjusted for inflation annually. Beginning in 2025, employees ages 60-63 will have a higher catch-up limit: 50% more than the regular catch limit or $10,000, whichever is greater.
Retirement Plans for 2025 & later:
- Required automatic enrollment and escalation for new plans: Unless employees opt out, new 401(k) and 403(b) plans must automatically enroll participants in the plan with a beginning salary deferral of 3% to a maximum of 10%. Deferrals must increase by 1% per year up to 10% to a maximum of 15%. Exemptions applying for small employers with under 10 employees, new businesses less than 3 years old, and church and government plans. Existing plans are not subject to this provision.
- Increased catch-up provisions: The catch-up maximum for employees is $7,500 for 2023 ($3,500 for Simple IRAs) and adjusted for inflation annually. Beginning in 2025, employees 60-63 will have a higher catch-up limit: 50% more than the regular catch limit or $10,000, whichever is greater.
- Retirement savings lost and found: To help individuals find information about previous employer retirement plans – the Department of Labor and IRA are required to establish an online searchable database. Plan sponsors will be required to provide information needed to populate the database.
- Saver’s tax credit becomes a government match (for tax payers beginning after 2026): The saver’s tax credit (up to $1,000 per individual) for lower income workers changes from a credit paid in cash to a federal matching contribution deposited into a retirement plan account or IRA. Also, the credit rate changes from a tiered range of 10%-50% of retirement plan and IRA contributions to an across-the-board 50%.
- “Backdoor” Roth conversions not addressed: Roth conversion rules were not changed to address the loophole of high earners, who are not eligible to open a Roth IRA but can open a traditional Roth and then convert to a Roth IRA.