Within the final days of 2022, both the House and Senate approved a massive $1.7 trillion omnibus spending bill. On December 29th, President Biden signed the bill into law. A much-anticipated component of that bill was SECURE 2.0 Act of 2022.
There are over 90 provisions in the new SECURE 2.0 Act which has been enacted. While some provisions are effective now, recordkeepers, custodians, and service providers will need time to update their systems and processes accordingly to accommodate.
There are provisions that impact both plan sponsors and participants. Many of the provisions were designed to help increase retirement security.
Below is a brief summary of a few of the numerous provisions. We’ll be providing more communication, information, and clarification throughout the year as well!
Required Automatic Enrollment and Escalation Provisions for New Plans: Any 401(k) or 403(b) plan established with plan years beginning after December 31, 2024, contain automatic enrollment provisions at 3%, but not more than 10% and automatically increases 1% each year, capped at 15%.
Saver’s Matching Contribution: Effective for tax years beginning after December 31, 2026, lower-income retirement savers will be eligible to receive a government-funded matching contribution to their individual retirement account (IRA) or retirement plan in an amount up to 50% of their contributions (phased out as the individual’s income increases), capped at a maximum of $2,000 and reduced by certain distributions that are taken by the individual.
Matching Contributions for Student Loan Payments: Effective for plan years beginning after 2023, 401(k), 403(b) and nongovernmental 457(b) plan sponsors are able to make matching contributions to employees for certain “qualified student loan payments” made by the employees for higher education expenses and to have these matching contributions treated as regular matching contributions for discrimination testing purposes. This provision is intended to make it easier for employers to provide employer-matching contributions to employees who are paying off student loans in lieu of making retirement plan contributions.
Increase in Catch-Up Contributions: Employees who are age 50 or older currently are eligible to make additional “catch-up” contributions to eligible retirement plans up to certain inflation-adjusted limits ($6,500 for 2022). Effective for tax years beginning after December 31, 2024, these catch-up contributions will be increased (to the greater of $10,000 or 150% of the “regular” age 50 catch up contribution amount) for employees who are reach ages 60, 61, 62, or 63 during the year.
“Rothification” of Catch-Up Contributions: SECURE Act 2.0 provides for certain contributions to be made on a Roth (i.e., after-tax) basis. Effective for tax years beginning after 2023, catch-up contributions to 401(k), 403(b), and governmental 457(b) plans by employees whose wages exceed $145,000 (as indexed) must be made on a Roth basis. This Roth treatment of catch-up contributions is mandatory for any plan that makes catch-up contributions available.
Optional “Rothification” Employer Matching and Nonelective Contributions: Effective for contributions made after the date of enactment of SECURE Act 2.0, plans may offer employees the ability to elect for some or all of the matching or nonelective employer contributions made to them under the plan to be characterized as Roth contributions, but only if the contributions are fully vested at the time they are made.
Ability to Offer De Minimis Incentives to Improve Retirement Plan Participation: Effective for plan years after the date of enactment, SECURE Act 2.0 loosens restrictions and allows employers to provide “de minimis financial incentives” (e.g., gift cards of a modest amount) that are not paid for with plan assets. The statute does not include any guidance on what constitutes a “de minimis financial incentive,” which presumably will be left to guidance from the Internal Revenue Service (IRS).
Emergency Savings Accounts Linked to Retirement Plans: Effective for plan years beginning after December 31, 2023, SECURE Act 2.0 allows sponsors of individual account plans (such as 401(k) or 403(b) plans) to create “emergency savings accounts” that permit non-highly compensated employees to make Roth after-tax contributions to a special savings account within the retirement plan. Balances in an emergency savings account must be eligible for distribution at least once per month, and contributions cannot be made to an emergency savings account that would cause the balance to exceed $2,500 (adjusted for inflation after 2024), or a lesser amount established by the plan sponsor. Importantly, an employee’s contributions to the emergency savings account must be eligible for matching contributions at the same matching rate established under the plan for elective deferrals (but the matching contributions are not made to the emergency savings account).
Increase in Required Beginning Date: Continuing a trend started in SECURE Act 1.0, the required beginning date age for commencing retirement plan distributions increases to age 73 starting on January 1, 2023, and then further increases to age 75 starting on January 1, 2033.
Withdrawals for Certain Emergency Expenses: Effective for withdrawals made after December 31, 2023, certain withdrawals or distributions from certain eligible retirement plans (e.g., 401(k) and 403(b) plans) for emergency expenses will not be subject to the 10% tax on early distributions. Only one emergency expense withdrawal of up to a maximum of $1,000 is permissible each year. The participant must be given the opportunity to repay the withdrawal within the following three years. Additional emergency expense withdrawals within the three-year period are limited if repayment has not been made or additional contributions have not been made equal to or exceeding the repayment amount.
Reliance on Employee Certification of Hardship: Effective for plan years after the date of enactment of SECURE Act 2.0, absent actual knowledge to the contrary, plans will be permitted to rely on a participant’s self-certification for deemed hardship events enumerated in the hardship regulations that the participant is eligible for a hardship withdrawal from a 401(k) or 403(b) plan or an unforeseeable emergency distribution from a governmental 457(b) plan. This simplifies the current structure under which the employer can rely on a participant’s self-certification as to the amount necessary to address the hardship but not their certification regarding the existence of the deemed hardship event itself.
Penalty-Free Withdrawals from Retirement Plans for Cases of Domestic Abuse: Effective for distributions made after December 31, 2023, plans can permit participants who self-certify that they have experienced domestic abuse within the past year to withdraw a portion of their retirement plan account (the lesser of $10,000 as indexed for inflation or 50% of the participant’s account). A withdrawal made pursuant to this provision is not subject to the 10% tax on early distributions and the participant has the opportunity to repay the withdrawn amount over a three-year period.
Penalty-Free Withdrawals for Individuals with Terminal Illnesses: Effective for distributions after the date of enactment, retirement plan distributions made to a participant who is otherwise eligible for a distribution and is “terminally ill” (as certified by a physician) will not be subject to the 10% tax on early distributions. The distribution can be repaid under rules similar to those for qualified birth or adoption withdrawals.
Schedule a meeting to learn how the SECURE 2.0 Act might affect you.
