SECURE 2.0 Bulletin
Congress just passed the Consolidated Appropriations Act. As with most government omnibus bills it’s designed to be completely unreadable. If you want an effective melatonin replacement for this winter - or simply want to do more due diligence on this legislation than your actual elected representatives did - here's a link to the full 4,000+ page bill. Who knows what kind of goodies you'll find buried there (if you work for the government no more TikTok on your work phone)! A shorter summary from the Senate Finance Committee is also available.
Thankfully you have Harmony to read it for you. If you want a primer on retirement plans, feel free to re-read our primer on retirement accounts.
As we dive into some more specifics. a big and necessary disclaimer: there will inevitably be edits made to the Act and this is merely a high-level summary. We encourage individuals and small business owners to consult with their tax team and their financial advisor before acting on any planning opportunities.
Changes to Retirement Plans
Under the Act, Companies instituting new 401(k) and 403(b) plans would have to start automatically enrolling participants. These auto-enrollees start with a required salary deferral of at least 3% of salary (not to exceed 10%). Deferrals would then escalate at 1% per service up to a minimum of 10% (maximum 15%). Employee’s would be free to opt out of the auto-enrollment and escalation provisions. Exempted from this provision are small businesses, new businesses and church and government plans. Additionally, there are additional tax credits for small businesses surrounding the start-up administrative costs of setting up a plan.
The SECURE Act 2.0 authorizes the creation of both SIMPLE Roth accounts, as well as SEP Roth IRAs, for 2023 and beyond. Previously, SIMPLE and SEP plans could only include pre-tax funds. The act also allows employers to make additional contributions to SIMPLE plans in a uniform manner not to exceed $5,000 or 10% for all employees making less than $50,000.
More “Roth Contributions”
With most individual retirement plans, or IRAs (Individual Retirement Accounts), there is a “Traditional” and “Roth” option. The traditional option features pre-tax deductible contributions but withdrawals are taxed. In contrast, Roth contributions are made after-tax but withdrawals are tax-free. The Secure Act increases the ability of employees to elect Roth treatment and forces some employees to do so.
Employers can now allow their matching contributions to go to a Roth subaccount of 401(k), 403(b) or 457(b) programs. Additionally, beginning in 2023, the bill authorizes the creation of both SIMPLE Roth accounts, as well as SEP Roth IRAs, for 2023 and beyond. Previously, SIMPLE and SEP plans could only include pre-tax funds.
Certain high-income taxpayers' catch up contributions will have to be Roth contributions. Section 603 of SECURE Act 2.0 creates a mandatory 'Rothification’ of catch-up contributions for certain high-income taxpayers starting in 2024 (likely in an effort to increase revenue to help pay for other parts of the legislation). The new rule applies to catch-up contributions for 401(k), 403(b), and governmental 457(b) haplans, but not to catch-up contributions for IRAs, including SIMPLE IRAs. Interestingly, this rule will apply to eligible participants whose wages exceed $145,000 in the preceding calendar year from the employer sponsoring the plan. Changing employers could lead to this rule not applying to you should you make over $145,000 annually. Also, if your employer’s retirement plan does not allow for Roth accounts in their 401k, then this is not applicable.
College Savings Plans/Student Loans
Beginning in 2024, some individuals will have the ability to move 529 plan money directly into a Roth IRA. This new transfer pathway, created by Section 126 of SECURE Act 2.0, will be an intriguing option for some individuals, but it also comes with a number of conditions that must be satisfied for the transfer to be valid and that limit the ability to take advantage of (or abuse) the provision. For example, there will be lifetime transfer limits and a minimum number of years in the 529 plan before being eligible.
Additionally to help ease the burden on taxpayers with significant student debt – Section 110 allows such employees to receive employer matching contributions to their retirement plan by reason of repaying their student loans. Section 110 permits an employer to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to “qualified student loan payments.” A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee
Catch-Up Contributions
Effective for 2025 and in future years, SECURE Act 2.0 increases employer retirement plan catch-up contribution limits for certain plan participants in their early 60s. Their plan catch-up contribution limit will increase to the greater of $10,000 (indexed for inflation), or 150% of the regular catch-up contribution amount. Similarly, SIMPLE Plan participants who are age 60, 61, 62, or 63 will have their plan catch-up contribution limit increased to the greater of $5,000 (indexed for inflation) or 150% of the regular SIMPLE catch-up contribution amount.
Additionally, SECURE Act 2.0 will finally allow the IRA catch-up contribution limit to automatically adjust for inflation, effective starting in 2024. Inflation adjustments will be made in increments of $100, so get ready to keep track of the $1,200 IRA catch-up contribution limit in the not-too-distant future!
Changes to Required Minimum Distributions (“RMDs”)
The age for required minimum distributions, or when you are required to take distributions from your retirement account is currently 72. It would be increased to 73 in 2023 and 75 in 2033. In addition, the bill decreases the penalty for missed RMDs (or distributing too little) from 50% to 25% of the shortfall, and if the mistake is corrected in a timely manner, the penalty is reduced to 10%.
Effective in 2024, the SECURE Act 2.0 eliminates RMDs for Roth accounts. Currently, while Roth IRAs are not subject to RMDs during the owner’s lifetime, employer plan Roth accounts, such as Roth 401(k) plans, Roth 403(b) plans, governmental Roth 457(b) plans, and the Roth component of the Federal Thrift Savings Plan, are subject to the regular RMD rules.
In general, Section 72 of the Internal Revenue Code imposes a 10% penalty for distributions from retirement accounts taken prior to reaching age 59 ½. Historically, there were a limited number of exceptions to the 10% penalty in the event taxpayers have certain expenses (e.g., higher education or deductible medical expenses) or experience certain events (e.g., death or disability) it deems as an acceptable excuse to dip into retirement savings earlier than is generally intended. Under the SECURE Act 2.0, additional early withdrawal exceptions have been expanded to include:
Private-sector firefighters
State and local corrections officers
Qualifying workers with 25 or more years of service for an employer
Qualified disaster distributions
Individuals with terminal illness
Victims of domestic abuse
Qualified long-term care distributions
These are some highlights of the bill which also includes the ability of employers to add de minimis incentives to encourage plan participation, auto-portability of plans as employees change jobs, a Department of Labor database for employees to locate missing retirement accounts and dozens of other provisions relating to the administration of retirement plans.
We urge you to get in touch with your financial advisor and tax team regularly to advise on retirement issues. We’re here to answer your questions.
The TL; DR
Below is a summary of some key provisions (taken from Plan Advisor) :
Auto-enrollment into New 401(k) w/ escalation: New 401(k) and 403(b) plans are required to auto-enroll eligible employees. The minimum starting salary deferral is at least 3% of salary (max 10%) and escalates at 1% per year of service up to a minimum of 10% and maximum of 15%. An employee can opt out of the auto-enrollment and escalation. Small businesses, new businesses and church and government plans are exempted from this provision.
For low-income taxpayers, increased tax credits: Starting in 2027, taxpayers with under $35,000 in income ($71,000 joint) could receive a tax credit of 50% of their retirement contributions, with a $2,000 limit.
Required Minimum Distributions: The current age for required minimum distributions is 72 and will increase to 73 in 2023 and 75 in 2033.
Catch-up Contributions: For plan participants aged 60 through 63, maximum catch-up contributions increase to $10,000 or (150% of the regular catch-up amount) for those aged 50 and older.
Student Loan Matching: Starting in 2024, employers could match student loan payments with plan contributions. The provision would not be limited to governmental debt.
Emergency Savings: Participants would be permitted to withdraw up to $1,000 in one withdrawal per year without an early-withdrawal tax penalty. They would have the option to repay this amount in three years and could not withdraw in this fashion again for three years unless the earlier withdrawal has been repaid. Employers could also offer a retirement plan-linked emergency savings account that would allow four penalty-free withdrawals per year. Employees could contribute a maximum of $2,500 to such an account.
Hardship Withdrawals: Participants could withdraw up to $22,000 to pay for expenses related to a natural disaster, which would be taxed as gross income over three years without additional penalty. Survivors of domestic abuse could also withdraw the lesser of $10,000 or 50% of their retirement account without penalty upon self-certification as a survivor of domestic abuse.
College-Savings Account Rollover: Leftover 529 account savings could be rolled over into a Roth IRA without penalty, provided the rollover amounts fall within IRA limits and the 529 is at least 15 years old.
Part-time employees: Part-timers would have to be enrolled in their employer’s 401(k) after two years, instead of the current three.
Auto-portability: A plan provider could transfer a participant’s retirement savings from a previous employer to their new one, unless the participant elects otherwise.