Significant Retirement and Tax Changes In the Secure 2.0 Act of 2022

The SECURE 2.0 Act of 2022 (“Secure 2.0”) was passed on December 29, 2022 and focuses primarily on enhancing retirement plan incentives for individual taxpayers.

Let’s review some key provisions of the bill and how they could impact you and your business.

Automatic Enrollment In Employer Retirement Plans

Human psychology is fascinating and Secure 2.0 plays into that by automatically enrolling employees in their employers’ retirement plan whenever the employee is first eligible to participate. This is not a new concept, but it hasn’t been legislatively mandated before now.

Employees may opt-out of participation, but studies show that more employees participate (fewer opt-out) when automatically enrolled than when employees need to opt-in to participate.

The default election term is that certain employers will withhold a minimum of 3% and a maximum of 10% of an employee’s compensation and contribute that to the plan. This withholding percentage will increase by 1% annually until it reaches a minimum of 10% and a maximum of 15%. All current 401(k) and 403(b) plans are grandfathered.

The following employers are not subject to this automatic enrollment provision:

• Employers with fewer than 10 employees

• Businesses that have not been in business for more than three years

• Churches

• Governments

This provision is effective for plan years beginning after December 31, 2024.

Retirement Savers Match

A nonrefundable credit is currently available for certain individuals who contribute to an IRA, employer plan or ABLE account. This credit is repealed and replaced with a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan. The match is equal to 50% of the individual’s contribution up to $2,000 per individual. The amount phases-out for taxpayers who file a joint return and have income between $41,000 and $71,000 ($20,500 and $35,500 for taxpayers who file single or married filing separate; $30,750 and $53,250 for head of household filers).

The Treasury Department will be advertising these changes in a marketing campaign to increase public awareness of this benefit.

This provision is effective for taxable years beginning after December 31, 2026.

Required Minimum Distribution Age Change

Secure 2.0 increases the maximum age for individuals to begin withdrawing retirement plan funds to 73 beginning on January 1, 2023 and increases it again on January 1, 2033 to 75. Previously, the SECURE Act of 2019 increased the age from 70 ½ to 72.

Retirement Plan Catch-Up Limits

For 2023, individuals 50 or older may contribute an additional $1,000 to their IRA accounts; the maximum allowed is $6,500 for those under 50. Individuals over 50 may also contribute an extra $7,500 to employer retirement plans for 2023; the maximum allowed is $22,500 for those under 50. Secure 2.0 indexes this catch-up contribution to inflation.

This indexing of the catch-up contribution amounts is effective for taxable years beginning after December 31, 2023.

Certain older employees who participate in their employer’s retirement plan are also allowed to make catch-up contributions. Secure 2.0 increases these catch-up contributions to the greater of 1) $10,000 or 2) 50% more than the regular catch-up amount in 2025 for individuals who have attained ages 60, 61, 62 and 63. The increased amounts are indexed for inflation after 2025.

These retirement plan catch-up contribution amounts are effective for taxable years beginning after December 31, 2024.

Student Loan Assistance

Student loan debt is hitting younger employees hard, hard enough that many aren’t saving for retirement and devoting whatever they can to paying down that debt. Secure 2.0 allows employers to make matching contributions to retirement plans with respect to qualified student loan payments. A qualified student loan payment is any debt incurred by the employee solely to pay qualified higher education expenses of the employee.

This section is effective for contributions made for plan years beginning after December 31, 2023.

Military Spouses Retirement Plan Eligibility

Many times, spouses of members of the military aren’t able to satisfy the minimum eligibility requirements required to become participants in employer plans or vest in employer contributions. Secure 2.0 provides small employers with a tax credit with respect to defined contribution plans if they satisfy all of the following requirements:

• Make military spouses eligible for plan participation within two months of their hire date,

• Make the military spouse eligible for any matching or non-elective contributions they would have been eligible for had they satisfied the vesting requirements of having two years of service and

• Make the military spouse 100% immediately vested in all employer contributions.

The credit is equal to the sum of $200 per military spouse and 100% of employer contributions up to $300 for a maximum credit of $500. The credit applies for three years with respect to each military spouse that is also not classified as a highly compensated employee.

This section is effective for plan years beginning after December 29, 2022.

Retirement Plan Participation Incentives

Many employer-sponsored retirement plans are subject to nondiscrimination testing which, if employee participation is low, can affect how much other employees may contribute to the plan. Employers are now allowed to provide de minimis financial incentives to employees for participating in employer-sponsored retirement plans. These incentives must be paid with non-plan funds.

This section is effective December 29, 2022.

Early Distribution Penalty Waiver

Normally, if an individual withdraws funds from a qualified plan or IRA and they are younger than 59 ½, the IRS would assess a 10% penalty on the amount of that distribution unless it was for certain qualified transactions like a first-time home purchase or medical expenses. Secure 2.0 allows an exception for certain distributions used for emergency expenses, which are unforeseeable or immediate financial need relating to personal or family emergency expenses and have the following terms:

• The early distribution may be taken only once per year,

• The distribution can be no more than $1,000 and

• The taxpayer may repay the distribution within three years.

If a taxpayer chooses to repay the distribution, no other distributions for emergency expenses may be taken during the repayment period unless full repayment has occurred.

This section is effective for distributions made after December 31, 2023.

Automatic Portability of Participant Accounts

Many participants of employer-sponsored retirement plans who have terminated employment with the sponsor leave their accounts with their former employer’s plan without rolling over the funds. Employers have had the option, depending on the balance in the plan, to either distribute those funds to participants immediately or roll the balance out of the plan and into an IRA for the participant after the participant’s termination of employment. Third-party administrators may now offer these services to automatically transfer accounts that satisfy the account balance requirements.

This section is effective for transactions on or after December 29, 2023.

Starter 401(k) Plan

Secure 2.0 allows employers that do not sponsor a retirement plan to create a plan that would generally require that all employees be automatically enrolled and contribute at a rate of between 3-15% of compensation.

This section is effective for plan years beginning after December 31, 2023.

Qualified Distribution of 529 Funds to Roth IRAs

Parents and caregivers of children may face uncertainty about whether to contribute to a 529 plan because, previously, those funds could only be used to fund qualified educational expenses. Secure 2.0 now allows beneficiaries of 529 college savings accounts to roll over a maximum of $35,000 over their lifetime from their 529 account to a Roth IRA.

These rollovers would be subject to Roth IRA annual contribution limits and the 529 account must have been open for more than 15 years. This provision may eliminate some of the hesitancy surrounding contributing to an account that may ultimately never be utilized if the child doesn’t go to college or have other qualified educational expenses or if the child secures scholarships that substantially pay for their higher education.

This section is effective with respect to distributions after December 31, 2023.

Resolution to Erroneous Excess Distributions From Retirement Plans

Many individuals receive more than they anticipated from a qualified plan like a 401(k) or IRA. The process for correcting these mistakes can be cumbersome and fiduciaries may require the individual to repay the plan for the excess amounts distributed, which could be a substantial amount if the error isn’t caught for several years.

Secure 2.0 allows plan fiduciaries to decide whether to recoup overpayments made to retirees. If plan fiduciaries decide to recoup overpayments, limitations and protections apply to protect innocent retirees.

This section is effective after December 29, 2022.

Penalty On Shortfall In Required Minimum Distributions

The penalty for failing to take the required minimum distribution amount from retirement plans has been reduced from 50% of the shortfall to 25%. If the failure is corrected timely, the penalty is reduced to 10%.

This section is effective for taxable years beginning after December 29, 2022.

There are a number of other provisions in the bill that are not summarized above, but most are aimed at making saving for retirement and withdrawing from tax-favored plans easier for individuals and participants.

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