The Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) contained provisions aimed at increasing access to tax-advantaged accounts and changes to required minimum distribution rules. The budget bill signed by President Biden on December 23, 2022 included the SECURE 2.0 Act of 2022 (“SECURE 2.0”). SECURE 2.0 builds on the SECURE Act with changes aimed to strengthen the retirement system and financial preparedness upon retirement.
The main highlights of SECURE 2.0 are:
- Beginning in 2023, the age that required minimum distributions (“RMD”) must start is increased to age 73. On January 1, 2033, the age increases to 75. The SECURE Act increased the age from 70 ½ to 72.
- The penalty for failing to take an RMD will decrease to 25% of the RMD amount (down from 50% currently) and 10% if corrected in a timely manner for IRAs. (Note: The IRS has the authority to waive the penalty if the failure to take the RMD was for reasonable cause).
- Beginning in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans (RMDs were never required to be taken from Roth IRAs).
- Starting January 1, 2025, individuals ages 60-63 will be able to make catch up contributions to employer retirement plans up to $10,000 annually. Participants 50 or older can still make catch up contributions under the current rules and limits ($7,500 in 2023). In what we’ll term as an ‘interesting twist’, if an individual earns more than $145,000 in the prior calendar year, all catch up contributions at age 50 or older are required to be made to a Roth account in after tax dollars.
- Employers will be able to provide the option to have vested matching contributions contributed to Roth accounts. Currently matching contributions are made on a pre-tax basis. Note it’s anticipated this may take time for those employers offering this option to have payroll systems updated, and recordkeepers are awaiting further guidance from the IRS on the mechanics required for how this will work.
- Starting in 2025, employers establishing new 401(k) plans will be required to automatically enroll eligible employees starting at a contribution rate of at least 3%.
- Starting in 2024, defined contribution retirement plans can add an emergency savings account that is a Roth account eligible to accept participant contributions for non-highly compensated employees of up to $2,500 per year. The first 4 withdrawals in a year would be tax and penalty free. Contributions could be eligible for an employer match depending on plan rules.
- Starting in 2024, employers may match employee student loan payments with matching contributions to their retirement plan.
- Changes to eligibility requirements for 401(k) plans were enacted in the SECURE Act. These changes were intended to open participation for so called long-term part time employees. Many 401(k) plans require employees to complete a year of service (usually defined as working at least 1,000 hours in a 12-month period) before becoming eligible. Some plans will also have a minimum age requirement (not exceeding age 21). The SECURE Act requires 401(k) plans to expand eligibility to employees who didn’t ever meet the year of service requirement but had three consecutive years of service with 500 or more hours to participate. Under SECURE 2.0, a plan must allow a part-time employee to participate if the employee has satisfied the SECURE Act rule, or, if the employee has completed two consecutive 12 month periods in which the employee worked at least 500 hours in each one of the two periods and reach age 21 by the end of the second 12 month period. Given the complexity of tracking service it wouldn’t be surprising if employers change eligibility provisions to avoid what could be costly mistakes.
As is typical with legislation, the devil is in the details. These are just some of the highlights and more to come.