SECURE 2.0: Now It’s Law – What Individual Investors and Employers Need to Know

Feb 21, 2023

By Kristy McElroy, CPA – Senior Manager

After passing the House in late March 2022, The Securing a Strong Retirement Act of 2022 (SECURE 2.0), was signed into law on December 29, 2022, under the Consolidated Appropriations Act. SECURE 2.0 covers more than 90 provisions aimed at boosting retirement savings and simplifying current rules for retirement plans. Many of the original provisions in the House bill were preserved in the final law.

Some of the provisions take effect in 2023 so we recommend employers and retirement savers alike consult with appropriate professionals to educate themselves on immediate and upcoming changes.

Here’s a look at some of the most far-reaching provisions of SECURE 2.0.

Automatic Enrollment & Escalation in 401(k) Plans

Employees generally enroll in an employer’s 401(k) plan by opting into it. An employee often gets an informational packet about the plan when they start a new job, and then they fill out a form or provide other information to the employer to become part of the plan.

SECURE 2.0 includes an automatic enrollment provision. Essentially, employees would automatically be part of the 401(k) plan when they start a new job or become eligible for the plan. However, an employee can opt out if they wish.

SECURE 2.0 also includes a provision that automatically increases the employee contribution rate each year. The initial rate is 3 percent of an employee’s compensation, increasing by 1 percent each year to a contribution rate of 10 percent, but not to exceed 15 percent. Employees can still opt to change their deferral rates or remove themselves from the plan altogether.

Employers need to incorporate the automatic enrollment and escalation provisions starting in 2025 with new retirement plans being established that year and beyond. The new automatic enrollment provision applies to companies that have been in business for three or more years and have eleven or more employees. It does not apply to existing 401(k) and 403(b) plans, church plans, and governmental plans.

Increase of the Lowest Age for Required Minimum Distributions (RMDs)

Individual investors are required to take some funds out of their retirement accounts on an annual basis. Currently, withdrawals from your IRA, SIMPLE IRA, SEP IRA, or another retirement plan must begin when you reach age 72. Under SECURE 2.0, that age will gradually increase over time:

  • Age 73 as of January 1, 2023
  • Age 75 as of January 1, 2033

Beginning in 2023, the costly 50 percent excise tax penalty for failing to take an RMD reduces to 25 percent on the amount that was not distributed as required. And if the missed RMD is corrected within two years, the penalty rate further reduces to 10 percent.

Additionally, the RMD requirement for employer-sponsored Roth accounts will terminate starting in 2024.

Changes to Catch-up Contributions

“Catch-up” contributions are an increase in the maximum amount investors can put into certain retirement accounts for those who are above a specific age. Right now, savers who are age 50 and older can increase the standard contribution limits to “catch up” on their savings amounts.

For 2023, the annual contribution limit for a 401(k) plan is $22,500, plus a $7,500 catch-up amount permitted. Individual retirement accounts (IRAs) have a maximum contribution of $6,500, with a $1,000 catch-up limit.

Under SECURE 2.0, those amounts are increased for older investors. Starting in 2025, the legislation allows at least $10,000 in catch-up contributions to employer-sponsored plans for those who are 60 to 63 years old with the amounts indexed to inflation in 2026. Additionally, beginning in 2024, the catch-up contributions for IRA holders 50 or older will be indexed to inflation.

SECURE 2.0 also specifies that all catch-up contributions would be subject to after-tax Roth treatment for employer-sponsored qualified retirement plans as of January 1, 2024. Presently, the taxpayer can choose whether they want their catch-up contributions to be Roth or not. This new provision will not apply to employees with compensation of $145,000 or less.

Matching Contributions

Before SECURE 2.0, all employer match contributions were pre-tax. However, as of the date of enactment, SECURE 2.0 allows the employee to choose whether the match contributions are made pretax or after taxes (Roth). One big advantage of Roth accounts is that the earnings grow tax-free. Having this additional tax shelter could be very helpful for the retirement-minded employee. Employers may amend their retirement plan to allow employees to elect after-tax Roth treatment for employer matches and catch-up contributions.

Student Loan Payments

SECURE 2.0 provides an incentive for employees to save for retirement while also paying off student loans. Beginning in 2024, employers are now able to make matching contributions to “qualified student loan payments.” This definition is deliberately broad so that most loans taken out to pay for educational expenses would be “qualified.”

The employee would have to certify the amount of qualifying student loan payments to the employer annually. Fortunately, these employer-matching contributions will have no impact on nondiscrimination testing.

529 Plan Rollover to Roth IRA

Congress added a provision in SECURE 2.0 that encourages families to contribute to 529 plans who may have otherwise hesitated to fund this type of educational plan. Due to various reasons, contributions can be trapped in a 529 plan and if earnings are withdrawn without being used for qualified education costs, they can incur income tax and a 10 percent penalty.

Starting in 2024, SECURE 2.0 allows for tax and penalty-free rollovers from 529 plan accounts held for at least 15 years to Roth IRAs. The beneficiary of the 529 plan account may roll over up to $35,000 over their lifetime to a Roth IRA held in their name. Additionally, the rollovers are subject to the annual Roth IRA contribution limits. This provision allows families to turn the 529 educational savings account into a retirement savings account without any penalty.

Expansion to Long-term Part-time Employees

The original SECURE Act (which became law in 2019) already expanded 401(k) eligibility to part-time employees who are with their employer for three consecutive years, with at least 500 hours of service. SECURE 2.0 takes this qualification a step further and decreases the eligibility period to two years. However, anything pre-2021 is disregarded for vesting (as is currently in place). This provision goes into effect for plan years beginning after December 31, 2024.

Changes to Qualified Charitable Distributions

SECURE 2.0 expands the type of charity that can receive a qualified charitable distribution. Beginning in 2023, those who are age 70½ or older may elect a one-time gift of up to $50,000 to a charitable remainder trust or a charitable gift annuity. This would be included as part of their $100,000 limit for that year. In addition, the $100,000 limit will now be indexed annually for inflation.

Putting It All Together

SECURE 2.0 relaxes and expands retirement rules making it easier for taxpayers to build their retirement funds. There will be some burden on employers to understand and implement changes to existing plans to be compliant with the new laws. Overall, the act accomplishes its goal of providing incentives for employees and individual savers to retire with a nest egg.

If you have any questions regarding SECURE 2.0 and your tax situation, please contact your MichaelSilver tax advisor at 847.982.0333.

Kristy McElroy, CPA – Senior Manager, works with high-net-worth individuals and flow-through entities in a variety of industries, including real estate, professional services, and private equity. Kristy has serviced individual and business clients for over 19 years; 6 of which with a Big Four public accounting firm specializing in real estate and private equity. Since joining MichaelSilver in 2019, Kristy has increased her focus on employee benefits and retirement planning. She is a member of the AICPA and ICPAS.

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