Secure Act 2.0
The original “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act) was signed into law on December 20, 2019. A new bill dubbed Secure Act 2.0, was introduced in November of 2022 and signed into law on December 29, 2022. The intention of the law is to build upon the existing Secure ACT by improving retirement savings opportunities. The recently adopted provisions offer new benefits to employers and employees in order to generate greater participation in retirement plans. Secure Act 2.0 will be a rolling process, where enhanced features will be implemented over the course of several years. There are 90 provisions in the updated Act; we will cover some of the key retirement provisions that have the broadest impact.
Changes to Required Minimum Distributions
The Original Secure Act raised the age for required minimum distributions (RMDs) from Traditional IRA accounts and workplace retirement plans to 72 from 70 ½. Effective January 1, 2023, the age for RMDs has been further increased to 73 and on January 1, 2033, the threshold age for RMDs will be increased to 75. In addition, the penalty for failing to take an RMD decreased to 25% from 50% of the undistributed amount. The penalty is further reduced to 10% if the undistributed portion of the RMD is subsequently taken in a timely manner. As for RMDs from inherited IRAs, these were eliminated with the original Secure Act, the only requirement was that an IRA had to be liquidated by individual beneficiaries within 10 years of the date of the original owner’s death. Secure Act 2.0 lacks clarity whether annual RMDs will be reintroduced alongside the 10 year liquidation requirement. Finally, starting in 2024, Roth accounts in workplace retirement plans will not be subject to RMDs.
Increased catch-up contributions and enhancements to workplace plans
Catch-up contributions allow people age 50 and older to contribute additional dollars above the maximum contribution limits to IRAs and workplace retirement plans. The 2023 catch-up contribution limit for IRAs remains at $1,000. Starting in 2024, it will be adjusted for inflation in $100 increments.
The 401(k) catch-up contribution has been increased to $7,500 from $6,500 for 2023. It is set to increase to $10,000 in 2025 for participants age 60 to 63, this provision will also be indexed for inflation in future years. In addition, starting in 2024 all catch-up contributions for participants earning over $145,000 annually must be made on an after tax basis.
Effective in 2023, as long as they are 100 percent vested to a workplace plan, participants can choose to have employer matching contributions directed to a Roth account. The matching contributions that are designated to a Roth would be included in the employee’s gross income, and therefore would be taxable. Even though this feature went into effect in January, it will not be implemented by plan administrators until late 2023 or early 2024.
In an effort to increase participation in workplace retirement plans, a provision has been adopted that treats student loan payments as retirement contributions for the purpose of qualifying for workplace matching contributions. The matching contributions for student loan payments must vest under the same vesting schedule as other matching contributions. Also, starting in 2025 part time employees who have worked two consecutive years of 500 hours must be allowed to participate in their company’s retirement plan.
Starting in 2025, employers who initiated new retirement plans after December 29, 2022 will be required to automatically enroll employees in their plan at a rate of at least 3 percent of eligible wages. Companies that are less than three years old or have 10 or fewer employees are exempt from the mandate.
Emergency withdrawals permitted
Under current law, a 10 percent penalty is imposed for taking a distribution from a retirement account prior to age 59 ½. Effective 2024, individuals can take up to $1,000 in a penalty free distribution for emergencies. Only one distribution is permissible per year. The taxpayer has the option to repay the distribution during the three-year repayment period. No further emergency distributions can be taken within the three-year repayment period until the original distribution has been paid back.
Saver’s Match
Beginning in 2027, the current “Saver’s Credit” tax credit will be replaced by the Saver’s Match. Qualifying employees will receive a federal matching contribution equal to 50% of the first $2,000 contributed by the individual. The match would be deposited into their traditional retirement plan account. The match will be phased out as income increases. For individuals the phase out range would be $20,200 to $35,500 and for married filing jointly the range is $41,000 to $71,000.
Effective January 1, 2024, eligible employers will have the option to establish a “Starter 401k” retirement plan. The new plan only allows employee elective contributions; employer matching or non-elective contributions are not permitted. The annual deferral limits match IRA contribution limits and the plan automatically satisfies the actual deferral percentage nondiscrimination test.
The new legislation also increased tax credits to small businesses to encourage plan creation. Effective immediately, the Small Business Startup Plan Tax Credit for employers with up to 50 employees has been increased from 50% to 100% of administrative costs with an annual maximum of $5,000 for the first three years. Annual administrative fees for small business plans rarely exceed $5,000.
The roll out of Secure Act 2.0 will continue over the next several years. The new mandates will increase opportunities for retirement savings and distributions. Even though Provident Investment Management doesn’t administer employer retirement plans, we will do our best to answer any questions that you may have about the new law and how it impacts you.
Dan Krstevski, CFP®