By now, you have likely heard of the new law called SECURE 2.0. It was passed at the end of 2022 as part of the big omnibus spending bill and contains numerous provisions relating to qualified retirement plans and IRAs. It is a follow-up of sorts to the original SECURE Act of 2019. Soon after the original SECURE Act was enacted, talk began of a potential new package of retirement plan reforms dubbed informally as SECURE 2.0. Bills containing some of these reforms were passed in the House or Senate with cool names like RISE & SHINE Act and EARN Act. When all was said and done, the law was named what they had been calling it all along, the SECURE 2.0 Act of 2022.

SECURE 2.0 contains 90-some retirement-related provisions. We won’t go through all of them here, although we do hit quite a few that are most relevant to our clientele. Some of the provisions deserve a full article on their own – and we will probably write several as time goes on and these provisions are clarified by the IRS and other agencies.

Every workplace retirement plan and every retirement saver will be touched in some way by SECURE 2.0. We recommend that everyone read over this summary or one like it to get a feel for what the new law has brought to us. Our summary will go somewhat chronologically, outlining provisions that take effect immediately, then moving to those that take effect at some future date.

Provisions Taking Effect in 2023

More contributions can be Roth now. Roth IRA and 401(k) contributions are taxed immediately, in contrast to traditional contributions which are made on a pre-tax basis and taxed later when withdrawn. Previously, SEPs and SIMPLEs could not be Roth IRAs. They had to be pre-tax. Now they can be Roth. Previously, employer contributions in a qualified plan or 403(b) could not be Roth. Now they can. These contributions are added to the employee’s income and must be 100% vested when made. (If you’re itching to do employer Roth contributions now, you might need to give your recordkeepers and other vendors a little time to get their systems set up.)

Age for RMDs. The age for required minimum distributions is going up again. For years, it was 70½. SECURE Act changed it to 72. Per SECURE 2.0, it will be 73 starting on January 1, 2023. It will be 75 starting on January 1, 2033.

RMD excise tax. Speaking of RMDs, the excise tax for failure to take an RMD is reduced from 50% to 25%. The tax is 10% if the shortfall is corrected during a two-year correction window.

Early withdrawal excise tax removed for some distributions. Most of the time, a distribution made to someone younger than age 59½ is subject to a 10% early withdrawal penalty. There are a handful of exceptions. SECURE 2.0 added some more exceptions, including distributions to individuals whom a doctor certifies is expected to live less than 84 more months. Such distributions may be repaid within three years. Also, distributions of excess IRA contributions (and earnings thereon) will no longer be subject to the 10% early withdrawal penalty, even if the distribution could have or should have been made earlier when the 10% tax applied.

Repayment of birth or adoption distributions. SECURE Act introduced qualified birth and adoption distributions and put no limit on when they had to be repaid to qualify as rollover contributions. SECURE 2.0 says they need to be recontributed within three years in order to qualify as a rollover contribution.

Hardship distributions. Previously, an employee had to show some documentation of a hardship in order to be able to receive a hardship distribution. Under SECURE 2.0, a plan administrator may now rely on an employee’s self-certification that they qualify for a hardship distribution and that they don’t have other monies to pay for the hardship.

Disaster relief. Previously, when there was a federally declared disaster, Congress would have to ease plan distribution and loan rules on a case-by-case basis. Now, there are permanent special rules for any qualified federally declared disaster. This applies for disasters occurring on or after January 26, 2021.

Retroactive first-year deferrals for sole proprietors. Under SECURE 2.0, for a sole proprietor who has no other employees, elective deferrals in the first year of a 401(k) can be made up to the tax return due date. In this case, that would be the original due date, not the extended one. Normally, deferral elections have to be made before the income is earned (which is the last day of the tax year for a sole proprietor) and contributions deposited within a short time frame. Apparently, for this first year only, the deferral election may be made after the plan year is over.

End of PBGC premium indexing. Most defined benefit plans are covered by the PBGC and have to pay a premium equal to a percentage of the underfunded amount (if any). About a decade ago, a law was passed increasing this variable premium rate each year for cost of living, which was widely disliked. (Imagine the percentage you pay for sales tax going up due to inflation, besides the extra money you are paying because things cost more.) SECURE 2.0 does away with this cost-of-living adjustment and sets the variable-rate premium permanently at 5.2% of unfunded vested benefits.

Cash balance interest. There are a number of challenges when a cash balance plan uses a variable interest crediting rate (such as Treasury yields or S&P 500) rather than a fixed rate. Among those is determining whether the plan satisfies the backloading rules, which prohibit too much of an employee’s benefit from accruing later in the career rather than earlier. What rate do you use to project account balances when the rate changes every year? SECURE 2.0 says you can use a projected rate that is “reasonable” but not in excess of 6.00%, which should make it easier to pass the backloading rules.  This change is not quite as exciting as people might think it is upon initial glance.  The change has nothing to do with what interest crediting rate you can use for determining benefits.  It also doesn't affect nondiscrimination or minimum participation testing.  It's just for backloading rules.

Small employer credit for startup costs. Previously, employers with fewer than 100 employees could be eligible for a tax credit on plan startup costs up to 50% of administrative costs, with a yearly cap of $5,000. SECURE 2.0 increases that credit to 100% for employers with up to 50 employees (still not to exceed $5,000). There is a new additional credit for five years of up to $1,000 per employee equal to a percentage of employer contributions to defined contribution plans. The percentage starts at 100% in years 1 and 2 and phases down over the next three years until going to 0% after five years. The credit phases out for employers with more than 50 employees and doesn’t apply to employees with wages exceeding $100,000 (indexed). An employer wouldn’t be able to take the credit and deduct those same contributions on the tax return.

Incentives to join plans. You used to not be able to offer employees an incentive to join the 401(k) or 403(b) other than the matching contribution. Now you can give them a small incentive, such as a gift card.

403(b) investments. Whereas previously 403(b)s had to be invested in annuity contracts and mutual funds, SECURE 2.0 now allows investments in collective investment trusts, although there remain securities laws issues for such investments.

QLACs. Premiums one may pay for qualifying longevity annuity contracts previously could not exceed the lesser of $125,000 (indexed) or 25% of the individual’s account balance. SECURE 2.0 removes the 25% limit and increases the dollar limit to $200,000 (indexed).

EPCRS expansion. The Employee Plans Compliance Resolution System is a program under which an employer who’s made a mistake may ‘fess up to the IRS before getting caught and pay a reduced penalty. Something called “self-correction” has been available for insignificant failures. Here, an employer doesn’t have to tell the IRS, and there is no penalty. Under SECURE 2.0, any eligible inadvertent failure is self-correctable under EPCRS, not just insignificant ones, unless the IRS catches the failure first or the self-correction isn’t completed in a reasonable time. EPCRS is supposed to be expanded to cover inadvertent failures by IRA custodians as well.

Qualified charitable distributions. A taxpayer age 70½ or older may currently make a distribution of up to $100,000 from an IRA directly to a charity and exclude the amount from income. These QCDs count toward the RMD requirement. SECURE 2.0 indexes the $100,000 limit starting after 2023. And, individuals will now be able to make a one-time election of up to $50,000 (indexed) for QCDs to certain split-interest entities, such as charitable remainder annuity trusts, charitable remainder unitrusts, and charitable gift annuities.

Provisions Taking Effect in 2024

401(k) and 403(b) catch-ups must be Roth for high earners. Catch-up contributions enable employees age 50+ to contribute more to a plan than those younger than 50. For employees with wages of more than $145,000 (indexed) in the previous year, any catch-up contributions in 401(k)s and 403(b)s (but not SEPs and SIMPLEs) will now have to be Roth.  Interestingly, this may not apply to self-employed individuals since they do not have wages.

Indexing of IRA catch-up limit. Remaining on the topic of catch-ups, the age 50+ catch-up contribution of $1,000 in IRAs had been hard-coded into the law. Now it’s going to be indexed in $100 increments in the same manner as regular IRA contributions.

Top-heavy changes. While many 401(k) plans require employees to complete a year of service to receive employer contributions, some allow employees to make salary deferrals with no wait. The problem is if the plan is top-heavy, these employees have to receive a minimum employer contribution, even if the employer intended to give them none. SECURE 2.0 will allow separate top-heavy contribution testing to be done for these “otherwise excludable employees,” making it unlikely they will need to receive a top-heavy minimum and decreasing the chance the employer will want to exclude them from the plan altogether.

Cashout limit. Currently, a former employee with an account balance of $5,000 who does not elect to withdraw his money may be forced out, either through a cash payment or rollover to an IRA, depending on the account size. After 25 years or so at $5,000, the involuntary cashout limit is increasing to $7,000.

Matches for student loan payments in 401(k)s, 403(b)s, and SIMPLEs. An employer will be able to make a matching contribution on an employee’s student loan payment as though it were a salary deferral made by that employee. The ADP test may apply separately to employees who receive such student loan matches. The employer may take the employee’s word as to the amount of loan payments made.

Starter 401(k)s. Employers that have no retirement plan may adopt a starter 401(k) or 403(b) which automatically enrolls employees at a deferral rate of 3% to 15%, has the same deferral limit as IRAs, and has no employer contributions. No ADP or top-heavy testing will be required.

Replacing SIMPLE with safe harbor 401(k). Currently, a SIMPLE IRA can’t be replaced with another plan mid-year. SECURE 2.0 permits an employer to replace a SIMPLE with a safe harbor 401(k) or other plan with mandatory employer contributions. Currently, rollovers may be made from a SIMPLE IRA to a 401(k) if the SIMPLE has been in place for two years. The two-year requirement is waived under SECURE 2.0.

Additional SIMPLE contributions. Besides the 2% nonelective contribution or 3% match, the employer will be able to make additional uniform SIMPLE contributions of up to the lesser of 10% of pay or $5,000 (indexed).

SIMPLE contribution limit. The SIMPLE deferral limit for employers with 25 or fewer employees is increasing to 110% of what the limit and catch-up limits would otherwise have been in 2024. Larger employers with up to 100 employees may use these higher limits if they are willing to increase the employer contribution to a 4% match or 3% nonelective contribution. 

Domestic abuse distributions. The early withdrawal excise tax will not apply to distributions to domestic abuse victims if the amount is not greater than the lesser of $10,000 (indexed) or 50% of the employee’s vested account balance. No mandatory tax withholding will apply. These distributions may be paid back and be treated as eligible rollover distributions within three years. Plan sponsors may take the participant’s word about the employee’s eligibility for the distribution.

Emergency withdrawals. SECURE 2.0 will allow one penalty-free withdrawal of $1,000 per year for emergencies (or the whole vested account, if less). It may be repaid within three years. Only one withdrawal in a three-year period may be made if the first withdrawal has not been repaid. The employer may take the participant’s word about the emergency and the need for funds absent actual knowledge.

Emergency savings accounts in individual account plans. Plans may be amended to offer short-term emergency savings accounts for Non-Highly Compensated Employees. Contributions must be post-tax (Roth) and are subject to any matching contributions the plan offers. Participants may be automatically enrolled at up to 3% of pay. Contributions must be capped at $2,500 (indexed) or lower. There cannot be a minimum contribution or balance requirement. One withdrawal per month must be allowed. The first four withdrawals per year cannot be subject to fees. 

Rollovers from 529 plans to Roth IRAs. Certain assets in 529 qualified tuition program accounts maintained for at least 15 years may be rolled over to a Roth IRA maintained for the beneficiary of the 529 account. The rollover for a given year may not exceed the Roth contribution limit for that year, with a lifetime limit of $35,000. You also can’t roll over more than the aggregate amount of contributions (and earnings thereon) made before the five-year period ending on the date of the rollover.

Family attribution changes. Currently, businesses owned separately by the parents of a minor child can comprise a controlled group when there would be no controlled group if they didn’t have a minor child. Under SECURE 2.0, a controlled group would no longer result from these situations. There are also changes in how community property laws are applied.

Amendments to increase benefit accruals. Plans will be able to make discretionary amendments to increase benefits for the previous year until the employer’s tax filing deadline (including extensions). Before SECURE 2.0, the amendment generally had to be done by the end of the plan year for which it was effective.

No more RMD requirement for Roth 401(k)s. Previously, minimum distributions were generally not required from Roth IRAs, but they were required from Roth balances inside 401(k)s. SECURE 2.0 eliminates the RMD requirement for any Roth balances in qualified plans.

Post-death spousal RMD rules. SECURE 2.0 will allow a spouse beneficiary to irrevocably elect to be treated as the employee for RMD purposes. If the spouse is the sole designated beneficiary, the applicable distribution period after the participant’s year of death is based on the uniform life table.

DB Annual Funding Notices. More/different information is going to have to be put on the Annual Funding Notices issued for PBGC-covered defined benefit plans.

EPCRS change for deferral failures. With all the new requirements for automatic enrollment, automatic escalation, etc. mentioned below, it’s likely there are going to be errors made. The IRS’ correction program will be updated to grant relief for salary deferral errors corrected within 9½ months of the end of the plan year in which the error was made.

Provisions Taking Effect After 2024

Higher catch-up limits. The available catch-up contribution is increasing for individuals age 60 to 63 to the greater of $10,000 and 150% of the regular catch-up amount in effect for 2024. For SIMPLEs, those age 60 to 63 will have a catch-up limit of the greater of $5,000 and the regular catch-up amount for 2025. When the employee turns 64, the normal catch-up limit applies again. Effective date: Taxable years beginning after December 31, 2024. 

Long-term part-time in 401(k). The SECURE Act said any employee age 21 working at least 500 hours per year in three consecutive years had to be allowed to defer in the employer’s 401(k). SECURE 2.0 reduces the number of years of service to two. Service before 2023 may be disregarded for eligibility purposes. Service before 2021 may be disregarded for vesting purposes. Effective date: Plan years beginning after December 31, 2024.

Automatic enrollment. New 401(k) and 403(b) plans must automatically enroll employees with a default deferral rate of between 3% and 10% of pay, plus automatic escalation of 1% per year up to a maximum of at least 10%, but no more than 15%. Various plans are exempt, including those sponsored by small employers with 10 or fewer employees, SIMPLEs, and new employers that have been in existence less than three years. Most existing plans established before SECURE 2.0 are exempt. Effective date: Plan years beginning after December 31, 2024.

More information for DB lump sum windows. Plan sponsors will have to provide certain information regarding lump sum window offers 90 days before a decision period. Oh, and the information has to be written in clear language. It may be a while before this goes into effect. Department of Labor and Treasury are supposed to write joint regulations on this no earlier than one year after SECURE 2.0 enactment.

Lost and found. An online searchable database to collect information on benefits owed to missing, lost, or non-responsive participants is supposed to be set up no later than two years after SECURE 2.0 was enacted.

Long-term care. Starting three years after SECURE 2.0 was enacted, retirement plans may distribute limited amounts to be used for long-term care insurance. These distributions would not be subject to the 10% early withdrawal tax or mandatory withholding.

Paper statements. DC plans allowing directed investments will have to provide one benefit statement per year on paper. DB plans have to offer paper statements once every three years. Effective date: Plan years beginning after December 31, 2025.

Saver’s Match. The saver’s tax credit will be replaced with a refundable matching contribution that must be contributed to the taxpayer’s IRA or eligible retirement plan on a pre-tax basis. The current 10% to 50% tiers will be changed to a single credit percentage of 50% for all savers below the adjusted gross income threshold, at which point the credit phases out. Effective date: Tax years beginning after December 31, 2026.

Industry practitioners are gaining additional understanding of this new law day by day. We will keep our clients updated with additional information as we get it.