SECURE 2.0 Brings Significant Changes to Retirement Plan Administration
On December 29, 2022, the SECURE 2.0 Act of 2022 (SECURE 2.0) officially became law as part of a larger omnibus spending bill. SECURE 2.0 builds on earlier reforms to the retirement plan system made in 2019 by the Setting Each Community Up for Retirement Enhancement Act (SECURE Act). Like its predecessor, SECURE 2.0 is a comprehensive law that imposes wide-ranging requirements on retirement plans, and provides exciting opportunities for employers to offer new retirement plan design features. Fortunately for employers, this new law’s requirements are not effective all at once. Forthcoming guidance from regulators, such as the Internal Revenue Service and Department of Labor, will help with the implementation of these requirements and design options.
The following is Conrad Siegel’s summary of SECURE 2.0’s most significant provisions affecting retirement plans.
Increase in Age for Required Minimum Distributions (Mandatory)
The SECURE Act raised the age for required minimum distributions from 70½ to 72. Under SECURE 2.0, the age for required minimum distribution is further increased to 73 starting on January 1, 2023, and then to 75 starting on January 1, 2033.
Employee Self-Certification for Hardship Distributions (Optional)
Defined contribution plans may allow a participant to take a lump sum distribution if the participant suffers an immediate and heavy financial need. SECURE 2.0 allows 401(k) and 403(b) plans to rely on employees’ self-certification that they suffered an event that constitutes such a hardship under IRS regulations. If a plan takes advantage of this change in law, the employee will not be required to submit any records or documentation of a hardship event.
Matching Contributions for Student Loan Payments (Optional)
Many employees miss out on employer matching contributions because their student loan payments make them unable to contribute to their retirement plan accounts. SECURE 2.0 addresses this issue by allowing employers to treat employees’ student loan payments as employee contributions for the purposes of calculating employer matching contributions. Employers may rely on employee certification of payment; however, implementation will still require the gathering and maintaining of information on individual employees’ loan contribution amounts.
Treat Matching or Nonelective Contributions on a Roth Basis (Optional)
Effective immediately, plan sponsors are no longer required to provide employer contributions in their defined contribution plans on a pre-tax basis. SECURE 2.0 allows employers to offer such matching or profit sharing contributions on a Roth basis, at the election of the participant. In order to make this option available, the employer contribution must be 100% immediately vested. Thus, this design may be more appropriate for a plan that already provides for safe harbor contributions with immediate vesting. Further guidance from regulators will assist with the complex implementation of this design option.
Eliminates Requirement to Pay Pre-Death Required Minimum Distribution from Roth Accounts (Mandatory)
Currently, participants are required to take pre-death required minimum distributions from Roth Accounts. SECURE 2.0 eliminates this requirement for plans that have Roth Accounts. This change aligns retirement plan minimum distribution requirements with those of IRAs. This change will become effective for minimum distributions required for years after 2023.
Catch-Up Contributions on Roth Basis for Highly-Compensated Employees (Mandatory)
Starting in 2024, SECURE 2.0 also eliminates the ability of highly compensated employees to make catch-up contributions on a pre-tax basis and requires them to make catch-up contributions on a Roth basis. This change to catch-up contributions will require plans without Roth Accounts to either add the Roth option or forgo offering any catch-up contributions to highly compensated employees.
Increases to Catch-Up Contribution Limit (Optional)
Employee contributions to retirement plans are capped at annual limits. A 401(k) plan may allow participants who have attained age 50 to make additional “catch-up” contributions beyond regular contribution limits. SECURE 2.0 makes significant changes to the limitations and characterization for plans that continue to permit catch-up contributions. Starting in 2025, for participants who have attained age 60, 61, 62 or 63, SECURE 2.0 increases the limit to the greater of $10,000 or 50% more than the regular catch-up amount, indexed for inflation. Participants who have attained age 64 or older are subject to the normal age 50 catch-up limit.
Increase in Dollar Limit for Mandatory Distributions (Optional)
Currently, if a participant’s account balance is greater than $1,000 but does not exceed $5,000 and the participant makes no election, a retirement plan may automatically transfer the participant’s account balance to an IRA when the participant separates from employment. Effective for distributions made after December 31, 2023, SECURE 2.0 increases the limit from $5,000 to $7,000.
Long-Term Part-Time Employees (Mandatory)
Retirement plans have long been required to comply with the 1,000 hour rule, which allows employees who work 1,000 hours per year to participate in their employers’ plans. The SECURE Act created new requirements for allowing long-term, part-time employees to participate in their employers’ 401(k) plans. SECURE 2.0 further increases these eligibility requirements for long-term part-time employees and extends these requirements to certain 403(b) plans. For plan years beginning after December 31, 2024, 401(k) plans and 403(b) plans covered by ERISA must allow employees who have satisfied either the 1,000 hour rule or completed 2 consecutive years of service where the employee completes at least 500 hours of service to participate in such plans. These long-term part-time eligibility requirements still do not apply to other types of retirement plans, such as 457(b) or defined benefit plans.
Emergency Expense Withdrawals (Optional Plan Provision/Mandatory Tax Treatment)
Generally, participants in qualified retirement plans must pay a 10% tax penalty on distributions paid to them prior to their normal retirement age, unless some exception applies. Effective January 1, 2024, SECURE 2.0 eliminates this 10% penalty for one distribution per year up to $1,000 from 401(k), 403(b) and 457(b) plans for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” The plan may permit participants to repay the emergency distribution within 3 years. Additional emergency distributions cannot be permitted during the 3-year period unless the participant has repaid.
Auto-Enrollment and Auto-Escalation for New Plans (Mandatory for new plans)
Existing plans will not see any change to auto-enrollment requirements. However, any plan established after December 29, 2022 must automatically enroll new participants at a contribution rate of 3% to 10%, and automatically escalate participants’ contribution rate by 1% each year. Participants may opt-out of either auto-enrollment or auto-escalation. New plans must contain these auto-escalation and auto-enrollment features in plan years beginning after December 31, 2024. These requirements do not apply to existing plans, governmental or church plans, or certain new or small businesses.
Starting in 2027, participants below certain income thresholds will receive a matching contribution directly from the federal government that must be deposited into the participant’s retirement plan or IRA. The matching rate will be 50% for all participants below certain income amounts ($41,000 for married filing jointly and $20,500 for single). There will be a phased out matching rate for taxpayers earning more. The mechanics for such an ambitious program have not been determined.
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