On December 29, 2022, President Biden signed the $1.7 trillion Consolidated Appropriations Act of 2023 into law. This act combined provisions of three different bills and enacted the SECURE 2.0 Act of 2022. The goal of the Act is to expand retirement plan access to more workers, building upon changes that were implemented in the 2019 SECURE Act.
The SECURE 2.0 Act contains 92 retirement savings provisions that boost incentives for businesses, promote financial readiness and offer more flexibility to those saving for retirement. Each provision has different effective dates, below is a short list of provisions in the Act.
Provisions Effective Immediately
Employers will need to consider updating their employee notices and plan procedures to reflect these important law changes immediately.
Required Minimum Distributions (RMDs)
The requirement to begin taking required minimum distributions (RMDs) will increase from age 72 to 73. In 10 years (2033), the age will move up to 75.
Reduction in Excise Tax on Retirement Plan Accumulations
The Act reduces the penalty for failure to take RMDs from 50% to 25% under Section 4974 (a). If the failure is corrected during the correction window, then the penalty is reduced from 25% to 10%. The period of the correction window begins on the date on which the Section 4974 (a) excise tax is imposed and ends on the earliest of:
- The date of mailing a notice of deficiency with respect to the excise tax
- The date on which the excise tax is assessed
- The last day of the second tax year that begins after the end of the tax year in which the excise tax is imposed
Retroactive First Year Elective Deferrals for Sole Proprietors
The Act allows sole proprietors to make an elective deferral under a 401(k) plan during the period before the time for filing the individual’s return for the tax year ending after or with the end of the 401(k) plan’s first year. This would be determined without any regard to extensions and the deferral would be treated as having been made before the end of the plan’s first year. Sole proprietors are defined as an individual who owns the entire interest in an unincorporated trade or business and is the only employee of that trade or business.
Disclosure Reduced for Unenrolled Employees
Employers are no longer required to provide most notices under ERISA or IRS rules to employees who do not participate in the plan. If applicable, employers must provide an annual reminder of the employee’s eligibility and deadline to participate in the plan along with providing any plan documents they request.
Provisions Effective in 2024
Employers should begin to consider how provisions that take effect in 2024 may affect their plan document and operation.
Required Minimum Distributions for Roth 401(k) Eliminated
The Act also eliminates RMDs for qualified employer Roth plan accounts.
Under the SECURE 2.0 Act, all catch-up contributions are subject to Roth tax treatment, which means these contributions will be made on an after-tax basis and qualified distributions will be excluded from income when made. There is an exception for participants whose wages for the prior calendar year do not exceed $145,000. The threshold will be adjusted for inflation on an annual basis.
As of right now, participants 50 years of age and older can contribute an extra $7,500 annually into their 401(k) account.
Tax-Free Rollovers from Section 529 Accounts to Roth IRAs
Beneficiaries of an IRC Section 529 college savings account can make direct trustee-to-trustee rollovers to a Roth IRA without any tax or penalty as long as the account has been active for more than 15 years at the time of the rollover. Aggregate rollovers cannot exceed $35,000 from any 529 account in their name to a Roth IRA over the course of their lifetime. Rollovers are subjected to the Roth IRA annual contribution limits.
Student Loan Debt
Employers can provide matching contributions to a 401(k) plan based on the student loan payment amount for employees who are paying student loans instead of saving for retirement. Student loan payments can be treated as retirement contributions for the purpose of qualifying for matching contributions in a workplace retirement account.
Emergency Savings Account
Employers may amend their defined contribution plan to offer short-term emergency savings accounts to non-highly compensated employees. These accounts will be funded with after-tax Roth salary deferrals up to $2,500, which is indexed for inflation. Employees can withdraw from the account once a month. The first four withdrawals of each plan year will not be subject to any withdrawal fees. Employers can enroll employees into these accounts at no more than 3% their salary. These contributions are treated as after-tax elective deferrals and are eligible to receive matching contributions. When employment is terminated, employees may take their emergency savings accounts as cash or roll them over into their new employer’s Roth 401(k) plan or Roth IRA.
Tax Penalty Waived for Emergency Distributions
The 10% tax penalty is waived for early withdrawals for certain distributions if employees are under the age of 59 ½. Employees can withdraw up to $1,000 per year for certain unforeseen personal or family emergency expenses and up to the lesser of $10,000 or 50% of the participant’s vested account balance for distributions in connection with domestic abuse. Employees may repay the withdrawn money over three years and claim a refund for the income taxes paid on the distributions. Additional emergency distributions are prohibited for three years unless repayment occurs.
Provisions Effective in 2025
Employers should consider how provisions that take effect in 2025 may affect their plan document and operation.
Requiring Automatic Enrollment
Beginning in 2025, the Act creates a new Section 414A which requires employers with 401(k) and 403(b) plans to automatically enroll eligible employees at a rate of at least 3%, but not more than 10%. Employers must allow permissible withdrawals within 90 days after the first elective contribution. At the end of each participation year, the contribution percentage must automatically increase by one percentage point (unless the participant elects otherwise) to at least 10%, but not more than 15% of the employees pay. The maximum percentage is 10% for any arrangements that are not a safe-harbor plan under Section 401(k) (12) or 401(k) (13). Employees are able to opt out or change their deferral percentages.
The following are exempt from this new provision:
- Plans established before the act’s enactment date
- SIMPLE 401(k) plans, Section 414(d) governmental plans and Section 414(e) church plans
- New companies in business for less than three years
- Businesses with 10 or fewer workers
Expanded Eligibility for Long-Term and Part-Time Employees
The original SECURE Act requires employees who work between 500 and 999 hours for three consecutive years to be allowed to participate in their company’s 401(k) retirement plan. In 2025, SECURE 2.0 reduces the time-period to two years for those who have worked at least 500 hours and extends the requirement to 403(b) plans.
Retirement Savings “Lost and Found”
The SECURE 2.0 Act will establish an online searchable database, within two years of enactment, that will help people find retirement benefits that they lost track of. This national online “lost and found” will be run by the Department of Labor (DOL) and should be available in 2025.
In 2025, the catch-up contribution amount will increase to $10,000 for participants ages 60 to 63. After 2025, the amounts will be indexed for inflation.
Provisions That Take Effect in 2026 and 2027
Even though these provisions do not take effect until 2026 and 2027, employers should still be aware for upcoming changes and plan accordingly.
Paper Benefit Statements
For plan years beginning after December 31, 2025, paper benefit statements must be provided to defined contribution plan participants at least once annually, and to defined benefit plan participants at least once every three years, unless a participant elects otherwise.
Saver’s Credit to Saver’s Match
In 2027, the SECURE 2.0 Act will replace the nonrefundable Saver’s Credit for certain IRA and retirement plan contributions. Lower-income employees will be eligible to receive a federal matching contribution up to $2,000 per year that would be deposited into their retirement savings plan. This will now be called Saver’s Match and will be 50% of the employee’s contributions but is phased out as income increases.
Employers should reach out to their BSSF advisor to assess what changes may be relevant to their circumstances.
About the Author
Randy Fackler CPA, CEPA, MST, is a Principal and the Tax Director at Brown Schultz Sheridan & Fritz and is one of the key members of the Firm’s Tax Department. He is responsible for managing tax consulting and compliance services for his clients as well as overseeing the tax department.