In December 2022, President Biden signed the Consolidated Appropriations Act of 2023, which contained the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act of 2022 (also known as SECURE 2.0). Included in SECURE 2.0 are dozens of retirement-related provisions that are intended to enhance provisions from the original SECURE Act of 2019. This article highlights a few key provisions.
Required Minimum Distributions (RMDs)
Employer-sponsored retirement plans, traditional IRAs and individual retirement annuities are subject to RMD rules, which require that accumulated benefits be distributed by the Required Beginning Date. SECURE 2.0 increases the required minimum distribution age to 73 starting on January 1, 2023, and boosts it to 75 starting on January 1, 2033. This change allows people to delay taking RMDs and paying taxes on them.
The law also relaxes the penalties for failing to take full RMDs, reducing the 50% excise (or penalty) tax to 25%. If the failure is corrected in a “timely” manner, the penalty would drop to 10%.
Catch-up Contributions
Catch-up contributions allow people aged 50 or older to make additional contributions to their retirement accounts beyond the annual contribution limits set by the IRS. In 2023, the catch-up increased to an additional $7,500 on top of the $22,500 annual elective deferral limit. Deferrals under Savings Incentive Match Plan for Employees (SIMPLE) IRA plans are subject to a reduced annual elective deferral dollar limit ($15,500 for 2023), with an additional catch-up contribution of $3,500 for 2023.
The SECURE 2.0 Act adds a catch-up contribution limit for employees 60 to 63 years of age starting in 2025. This catch-up contribution maximum is the greater of $10,000 ($5,000 for SIMPLE plans) or 50% more than the regular catch-up amount in effect for the taxable year and will be indexed for inflation annually.
The law also changes the taxation of catch-up contributions, which could reduce the upfront tax savings for those who max out their annual contributions. Catch-up contributions will be treated as post-tax Roth contributions. Previously, you could choose whether to make catch-up contributions on a pre- or post-tax basis. An exception is provided for employees whose compensation is $145,000 or less (indexed for inflation).
Automatic Enrollment in Retirement Plans
Beginning in 2025, new 401(k) plans must automatically enroll participants when they become eligible. However, the employees may opt out. The initial automatic enrollment contribution amount is at least 3% but no more than 10%. Then, the amount is automatically increased every year by 1% until it reaches 10%. Existing 401(k) and 403(b) plans are exempt, and the law provides exceptions for small and new businesses.
Part-time Employee Eligibility
SECURE 2.0 lowers the hurdles for long-term, part-time employees to participate in 401(k) plans. They’ll still need to work at least 500 hours before becoming eligible, but they’ll have to work for only two consecutive years, rather than the three years required by the first SECURE Act. The provision takes effect for plan years beginning January 1, 2025.
Small Business Tax Credits
To incentivize small businesses to establish retirement plans, SECURE 2.0 creates or enhances some tax credits. For example, it increases the startup credit from 50% to 100% of administrative costs for employers with up to 50 employees. Additional credit is available for some non-defined benefit plans, based on a percentage of the amount the employer contributes, up to $1,000 per employee.
Eliminating Unnecessary Plan Requirements Related to Unenrolled Participants
Before January 1, 2023, employees eligible to participate in a defined contribution plan were required to receive numerous intermittent notices and explanations of their rights and options under the plan, such as an explanation of available investment options. These intermittent notice requirements generally apply even where eligible employees have opted not to participate in the plan.
SECURE 2.0 amends the Internal Revenue Code and ERISA to provide that defined contribution plans are exempt from intermittent notification requirements concerning “unenrolled participants.” Unenrolled participants are employees who are eligible to participate in the plan, have already received a summary plan description and any other required notices related to initial eligibility and are not participating in the plan. However, an unenrolled participant must still receive: (a) an annual reminder notice of their eligibility to participate in the plan, as well as any applicable plan deadlines; and (b) any document they request that they would be entitled to receive under existing law absent this Act’s provision.
Conclusion
SECURE 2.0 is one of the broadest pieces of retirement plan legislation in decades and will have lasting impacts on all types of retirement plans. Employers need to review existing retirement plan documents to ensure compliance with the above rules and other rules included in SECURE 2.0. There may be required amendments needed to bring retirement plans into compliance on the various compliance dates.
For more information on this topic, you may contact Joe Chemotti at (315) 472-9127 or visit www.dmcpas.com.
