January 24, 2023
The Secure 2.0 Act, or Securing a Strong Retirement Act of 2022, was signed into law December 29, 2022 as a follow up to the Setting Every Community Up for Retirement Enhancement Act of 2019 (Secure Act). The focus of this legislation was enhancing retirement savings opportunities and employees’ ability to save for retirement. While the Secure Act 2.0 (the Act) makes a number of changes, employers and individuals should be aware of what actions are required of them, and new options that are available moving forward.
Employees Automatically Enrolled in Retirement Plans. For new plan years beginning after 2024, employers will now be required to enroll any new employees in a 401(k) or 403(b) retirement plan as soon as they meet the criteria to enroll. There are some exceptions for small businesses, but overall, the bill requires 401(k) and 403(b) plans to enroll employees at 3% and increase annually to 10% with a 15% cap. Employees may opt out of this, but the hope is that this automation will serve to get more employees prepared for retirement.
Currently, part-time employees qualify to participate in a 401(k) plan if they have completed 500 hours of service for three consecutive years. This will be lowered to 500 hours of service for two consecutive years beginning in 2025.
Required Minimum Contributions. The age for required minimum distributions (RMDs) will be raised from 72 to 73 starting January 1, 2023. In 2033 the RMD age will raise to 75 and the penalty for failing to make RMDs timely will be cut in half. These changes are meant to reflect the current life expectancies more accurately.
Catch-up Contributions. Those citizens that are age 50, and older, can currently make additional deposits to a qualified retirement plan (401(k), 403(b) and 457(b)) above the standard maximum contribution. The catch-up amount will start rising with the first increase being from $6,500 to $7,500 in 2023.
Additionally, those ages 60-63 will be able to add up to $10,000/year starting in 2025. Beginning in 2024 all catch-up contributions will be on a Roth (after-tax) basis, with there being an exception for taxpayers who earn compensation of $145,000/year or less and adjusted for inflation.
For IRAs the current catch-up is limited to $1,000. The Act makes the IRA catch-up amount adjusted annually for inflation for tax years beginning after 2023.
Student Debt Payment Matching. To help those that have forgone saving for their retirement to focus on paying down student loans, the Act allows employers to make retirement contributions that match the amount the individual is paying in student loans. The amount is limited to the annual deferral amount ($22,500 for 2023) less actual deferrals made by the employee for the year. This will be effective in 2024.
529 Plan Rollovers. Those that have a leftover amount in a 529 Plan will be able to roll up to a $35,000 balance into a Roth IRA. The $35,000 is a lifetime limit and does have a few restrictions, such as only applying to those accounts that have been open for more than 15 years. It’s a great alternative to taking the balance out as a non-qualified deduction and being subject to income tax and possibly a 10% penalty on the withdrawn amount.
Roth Employer Plans. There are no current provisions that allow employer matching for after-tax Roth 401(k) plan contributions. Beginning in 2023 individuals may choose to have matching employer contributions applied to their Roth accounts.
In 2023, employers will be allowed to create Roth accounts, open to after-tax contributions for SIMPLE and SEP retirement plans.
Starting in 2024, workplace-based Roth plans will no longer be subject to RMDs.
Early Withdrawals. Any non-qualifying withdrawals from a retirement account are currently subject to a 10% penalty. Starting in 2024, qualified participants can take a penalty-free distribution of up to $1,000 once per year due to personal financial emergency.
The Act also allows for the following “hardship” withdrawals:
- An individual diagnosed as having a terminal illness within a period of 84 months after physician certifies the diagnosis.
- Beginning in 2024, victims of domestic abuse are allowed to take a “hardship” withdrawal of the lesser of $10,000 or 50% of the present value of the account. The funds must be taken within a year of the reported abuse.
Saver’s Match. Individuals that meet lower income thresholds can claim a tax credit for contributions made to an IRA or workplace savings plan under the Saver’s Credit. In 2027, the credit will be replaced by a Saver’s Match program. This program will match up to $1,000/year contributed by an individual to a qualified retirement plan via a federal matching contribution.
Credit for Start-up Cost. Under the original Secure Act, the credit was 50% of start-up costs (capped at $500 per employee) for the 1st three years of the plan. Under Secure 2.0, effective for tax years after 2022, for employers with 50 or fewer employees, the credit is 100% of start-up costs (capped at $1,000 per employee) for years 1 & 2, 75% for year 3, 50% for year 4, and 25% for year 5. The wage limit is $100,000, so no contributions with respect to any employee who received wages from the employer in excess of $100,000 may be taken into account for that taxable year. The plan must be an “eligible plan”. The 100% credit is phased out for employers with 51 -100 employees by 2% for every employee over the 50 mark.
Qualified Charitable Distributions. Currently, those age 70.5 and older can apply up to $100,000 of distributions per year towards a qualified charitable organization. Beginning in 2024, the maximum contribution amount will increase based on the inflation rate.
These changes are just the major changes that the Secure 2.0 Act will bring to retirement savings in the next few years. There are also numerous changes in the way information must be provided to individuals, notices and when changes need to be adopted. Please take a moment to review your specific situation with a tax professional to assure you are adhering to the new laws and taking advantage of tax-saving opportunities.