Secure 2.0 Act
Written by Lance Reising
The SECURE 2.0 Act of 2022 was signed into law by President Biden on Dec. 29, 2022. The legislation builds on the foundation laid by the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act to further improve upon the success of the private employer-based retirement system. The goal of both pieces of legislation is to make it easier for businesses to offer retirement plans and for individuals to save for retirement.
There are 92 provisions in the new SECURE 2.0 Act—and by at least most assessments, they are deemed to be helpful to the cause of promoting retirement security. Not all provisions will be, of course, and some will require some serious retooling of existing retirement plan administration mechanisms for plan custodians, administrators, and perhaps, for plan sponsors.
Below we highlight what we feel are some of the most significant parts of the law as it may affect both our existing plan clients and those interested in starting a new plan. Some of the provisions are effective immediately, or in 2023, while other provisions are effective in 2024 and later years. Some provisions of the 350-page bill require regulations and guidance that will be issued in the future.
A few highlights from Group Plan Systems:
Required minimum distributions: (RMD) age is raised from 72 to 73 beginning January 1, 2023, and from 73 to 75 beginning January 1, 2033. This means that anyone turning age 72 in 2023 will not need to take an RMD until they turn age 73.
Company-funded contributions can be treated as Roth contributions now when participants choose to elect to do so under 401(k), 403(b), and governmental 457(b) plans (effective December 29, 2022). This will now include matching funds and non-elective contributions which previously had to go into tax-deferred accounts.
Long-term, part-time employees mandatory years of service is reduced from three to two years to be eligible for enrollment in their employer’s 401(k) and extends the long-term, part-time coverage rules to ERISA 403(b) plans beginning in 2025.
Increases catch-up payments for older workers. Under current law, participants age 50+ can make an additional contribution ($7,500 in 2023) to their 401(k), 403(b), and governmental 457(b) plans. The catch-up amount increases to at least $11,250 a year for plan participants aged 60 to 63 starting in 2025.
Tax credits up to 100% of plan startup costs. These startup tax credits can be used to join PEPs and other MEPs too. New plan tax credits increase from 50% to 100% of qualified start-up costs per year for 3 years. There is a maximum amount of $5,000 per year for employers with 50 or fewer employees. Additionally, for those plans that offer employer contributions, they will receive an additional $1,000 tax credit with respect to eligible employees.
Mandatory auto-enrollment and auto-escalation for new plans. Automatic enrollment will become a mandatory feature for employers adopting new plans for employers with 11 or more employees who have been in business for three or more years. Default deferral rates may be set from 3% to 10% with auto-escalation of 1% per year up to a maximum of at least 10% but no more than 15%.
Saver’s Match vs. Saver’s Tax Credit. Beginning with tax years after 12/31/2026, the existing tax credits will be replaced by a federal matching contribution in an amount equal to 50% of contributions up to $2,000 annually deposited directly into the individual’s retirement account or IRA by the Treasury Department.
Emergency savings “sidecar” accounts and penalty-free withdrawals. Beginning in 2024, employers can establish an emergency savings account where employees can save up to $2,500 in a Roth-style account. Distributions will be treated like a qualified distribution from a Roth account if certain conditions are met.
Student loan matching. Student loan payments will be treated as Employee Elective Deferral for purposes of matching contributions.
“Starter 401(k)” or 403(b)— Employers not offering a retirement plan may offer starter 401(k) or 403(b) plans with employees enrolled by default at a 3 to 15% deferral rate. Annual deferral limit is the same as IRA contribution limits. This begins in 2024.
There will be many obstacles and/or delays to full implementation of SECURE 2.O, let alone the continuing work on SECURE 1.0. A few of the main obstacles or drawbacks we saw are as follows:
1. Massive systems updates for plan custodians, recordkeepers and TPA’s.
2. Long-term, part-time employees becoming eligible for deferrals in two years, not three, adds increased pressure for recordkeeping and plan census provision.
3. Sidecar emergency savings accounts are great and may be popular but they will be difficult to build in systems of recordkeeping and payroll systems.
4. Catch-up contributions must be Roth if income is above $145,000, so additional recordkeeping will be required.
5. One participant statement per year must be paper.
You can access the full document HERE.
If you have questions about how this impacts you or your plan, please reach out!