SECURE 2.0 is Here: What You Need to Know Now
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The SECURE 2.0 Act (the “Act”) was passed by Congress on Dec. 23 and signed into law by President Biden on Dec. 29, 2022. The Act is a sweeping piece of legislation that builds upon the 2019 SECURE Act (“Setting Every Community Up for Retirement Enhancement Act”) in an effort to modernize the retirement plan system, increase retirement savings, expand access to such savings, and simplify and clarify existing retirement plan rules.
The Act contains almost 100 retirement provisions. Among other things, the Act raises the age for the commencement of required minimum distributions, shortens the maximum period of service after which part-time employees become eligible for plan participation, and mandates automatic enrollment in new plans. The Act also creates new opportunities for plan sponsors to aid their workforce in retirement planning. Now, for example, plan sponsors can boost employees’ retirement savings by making matching contributions based on participants’ student loan repayments or deferrals to emergency savings accounts.
How Does It Affect Your Plan?
We have summarized 13 of the most significant changes to existing retirement plan rules to help you think through how the Act might affect your plan. The Act provisions summarized below appear in chronological order based on anticipated effective dates; each item applies only to defined contribution plans unless otherwise specified.
Thirteen Significant Changes:
Employers may allow non-highly compensated employees to defer, after tax, the lesser of (1) 3% of compensation or (2) $2,500 to an emergency savings account. These contributions are treated as elective deferrals for purposes of retirement matching contributions.
Employers may provide small, immediate financial incentives (e.g., gift cards in small amounts) to motivate employees to join their retirement plans.
Effective Jan. 1, 2023, participants must begin receiving RMDs at age 73 instead of age 72. Effective Jan. 1, 2033, the Act increases the age again to 75. This provision is applicable to both defined contribution and defined benefit plans.
Under current law, employers may distribute a participant’s retirement account balance without the participant’s consent if the vested benefit is less than $5,000. Effective for distributions made after Dec. 31, 2023, the Act increases this $5,000 amount to $7,000. This Act provision is applicable to both defined contribution and defined benefit plans.
Current law further requires employers to roll over such distribution into a default IRA if the account balance is greater than $1,000, unless the participant elects otherwise. This rule remains in effect under the Act, but the Act enables automatic portability. Effective Dec. 28, 2023, retirement plan service providers may automatically transfer a participant’s default IRA (established in connection with a former employer’s plan) into such participant’s new employer’s plan, unless the participant elects otherwise. This provision is applicable to both defined contribution and defined benefit plans.
For taxable years beginning after Dec. 31, 2023, employees who make more than $145,000 per year (indexed for inflation) may only make catch-up contributions on an after-tax Roth basis. Employees who make $145,000 per year or less may make such contributions on a pre-tax or after-tax basis.
For plan years beginning after Dec. 31, 2023, and for certain safe harbor plans, an employer may make matching contributions to a participant’s retirement account by reason of the participant’s making “qualified student loan payments.” In other words, the employer may treat student loan repayments as elective deferrals for purposes of retirement matching contributions.
Typically, when a participant makes an early withdrawal from a tax-qualified retirement account, an additional 10% tax applies to the distribution. Under the Act, participants may receive an early distribution of up to $1,000 per year, without incurring a tax penalty, if the distribution is for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.” Participants have the option to repay the amount of the distribution within three years. If they do not repay the distribution, they may not receive any further emergency distributions during such three-year period.
Under current law, the limit on IRA contributions is increased by $1,000 for employees who are at least 50 years old. Under the Act, for taxable years beginning after Dec. 31, 2023, this limit will be indexed for inflation.
The DOL must create a searchable, online national database for retirement plans, which employers can use to locate “lost” plan participants and vice versa. This database may log sponsors of and participants in both defined contribution and defined benefit plans.
Under current law, participants who are at least 50 years old may make catch-up contributions to their retirement plan in excess of otherwise applicable limits. In 2023, the limit on catch-up contributions is $3,500 for SIMPLE plans and $7,500 for all other plans. The Act increases this limit for participants aged 60-63 (inclusive) for taxable years beginning after Dec. 31, 2024. The increased limit is the greater of (1) $10,000, indexed for inflation; or (2) 150% of the regular catch-up amount, indexed for inflation.
Under the 2019 SECURE Act, employers must allow a part-time employee to participate in a 401(k) plan if the employee has either completed (1) one year of service, in which the employee completed at least 1,000 hours of service; or (2) three consecutive years of service, in each of which the employee completed at least 500 hours of service. Under the Act, for plan years beginning after
Dec. 31, 2024, this dual eligibility requirement remains, but the three-year rule (see (2) above) is reduced to two years.
New plans that begin after Dec. 31, 2024, must automatically enroll employees when they become eligible to participate. Automatic deferrals may start between 3% and 10% of compensation and must increase by 1% each year, up to a maximum of at least 10% but no more than 15% of compensation.
With respect to defined contribution plans, unless a participant elects otherwise, the plan must provide participants with at least one paper benefit statement each year.
With respect to defined benefit plans, unless a participant elects otherwise, the statement provided once every three years must be on paper.
Amendments Timeline
Plan amendments made pursuant to the Act must be made on or before the last day of the first plan year beginning on or after Jan. 1, 2025 (2027 in the case of governmental plans), but plans must be operated in accordance with the Act’s provisions as of their effective dates.
Stay tuned for more! In the coming months, we expect the DOL and IRS to provide important guidance regarding the implementation of the Act. In the meantime, to discuss your plan’s response to the Act, please contact a member of the Robinson Bradshaw Employee Benefits Team.
