The SECURE 2.0 Act of 2022 (SECURE Act 2.0) was enacted on December 29, 2022, as part of the Consolidated Appropriations Act, 2023. As previewed in a prior post, this legislation is designed to build upon the provisions of the original SECURE Act, with a goal of increasing participation in individual retirement savings plans. The extension of many expired/expiring tax provisions that had previously been discussed related to this legislation were not included in SECURE Act 2.0. We will continue to monitor and provide updates for any pending issues.
This post highlights several key provisions of the SECURE Act 2.0 that benefit individuals by allowing expanded plan coverage, selections and opportunities and by clarifying related rules.
Automatic Retirement Plan Enrollment
One of the most broadly applicable provisions of the SECURE Act 2.0 requires that, effective for plan years beginning after 2024, 401(k) and 403(b) sponsors automatically enroll employees in plans once they become eligible to participate in the plan. Under the requirement, the amount at which employees are automatically enrolled cannot be any less than 3% of salary, and no more than 10%. The amount of employee contributions is increased by 1% every year after automatic enrollment, increasing to at least 10% (but not more than 15%) of salary. Employees can opt out of the automatic enrollment if they choose or have such contributions made at a different percentage.
In addition, the SECURE Act 2.0 reduces the length of service requirements for part-time employees to participate in sponsored plans from three years to two years. As they are more likely to work part-time than men, this provision is particularly important for women in the workforce. Under the original SECURE Act, employers maintaining a 401(k) plan were required to offer dual eligibility (except in the case of collectively bargained plans). This requirement necessitated that an employee completed either a one year of service (with the 1,000-hour rule) or three consecutive years in which the employee completed at least 500 hours of service. The SECURE Act 2.0 reduces the three-year rule to two years, effective for plan years beginning after December 31, 2024.
The SECURE Act 2.0 includes important changes to the catch-up contributions to help older individuals accelerate retirement savings. Generally, the annual amount that can be contributed to a retirement plan is limited, and this limitation amount is generally subject to annual adjustments for inflation. For plan participants aged 50 or older, the contribution limitation is increased to allow for “catch-up contributions.”
For 2023, under current law, the amount of the catch-up contribution is limited to $7,500 for most retirement plans, $3,500 for SIMPLE plans, and is subject to inflation increases. Under the SECURE Act 2.0, a second increase in the contribution amount is available for participants aged 60, 61, 62, and 63, effective for tax years after 2024. For most plans, this additional catch-up limitation is the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the catch-up contribution for participants not aged 60 through 63. Like the standard catch-up amount, these limitations are subject to inflation adjustment.
The SECURE Act 2.0 also increases the annual limit on contributions to individual retirement accounts (IRAs) for participants aged 50 and older. The catch-up limit for IRAs is currently $1,000. Unlike the catch-up amount for other plans, this amount is not subject to increases for inflation under current law. However, beginning after 2023, the IRA catch-up amount will be adjusted annually for inflation as prescribed in the SECURE Act 2.0.
Finally, under current law, catch-up contributions to a qualified retirement plan can be made on a pre-tax or Roth basis (if permitted by the plan sponsor). For tax years beginning after December 31, 2023, the SECURE Act 2.0 provides that all catch-up contributions to qualified retirement plans will be subject to Roth tax treatment.
Required Minimum Distributions
The SECURE Act 2.0 also makes important changes related to required minimum distributions (RMDs) that will help retirees with decisions that will enhance their ability to make better use of their retirement savings.
Under current law, as enacted as part of the original SECURE Act, plan participants are required to begin taking RMDs at age 72. Under the SECURE Act 2.0, and effective for tax years beginning after 2022, the age at which participants must begin taking distributions is increased over a period of 10 years. The age is increased to 73 for individuals who attain age 72 after December 31, 2022, and age 73 before January 1, 2033. The age at which participants must begin taking RMDs is further increased to 75 for individuals who attain age 74 after December 31, 2032.
Other RMD Provisions under the SECURE Act 2.0
- Surviving Spouse Election – A surviving spouse may elect to be treated as if the surviving spouse were the employee for purposes of determining the date for RMDs.
- Beneficiaries of Special Needs Trusts – RMD rules related to special needs trusts are amended by replacing “no individual” with “no beneficiary.” Additionally, the Act clarifies that any beneficiary that is a “publicly supported” charitable organization shall be treated as a designated beneficiary.
- Penalty Reform – The penalty on failures to take an RMD is reduced from 50% to 25% (which can be further reduced to 10% if corrective action is taken in a timely manner.) The reduction is effective for tax years beginning after 2022.
Lower-income individuals may be eligible for the retirement savings contribution credit (saver’s credit) for contributions and deferrals to certain retirement plans. The credit applies to contributions for tax years beginning before 2027. The credit also applies to contributions to ABLE accounts for tax years beginning after December 22, 2017, and before January 1, 2026.
Currently, the credit is equal to the taxpayer’s applicable percentage, based on filing status and adjusted gross income (AGI), multiplied by up to $2,000 in total qualified retirement savings contributions. The maximum credit is $1,000. Additionally, the credit is a nonrefundable personal credit, so it can be claimed against the taxpayer’s regular tax liability and alternative minimum tax (AMT) liability.
For tax years beginning after 2026, the saver’s credit is significantly revised under the SECURE Act 2.0. The legislation provides a contribution of up to $2,000 for any eligible individual who makes a qualified retirement savings contribution for a tax year. Eligible individuals are anyone age 18 or older who is not a dependent or full-time student and who is not a nonresident alien.
Under the SECURE Act 2.0 provisions, the calculation is simplified from the current three-tier structure based upon income amounts, to a unified 50% credit amount. To allow more taxpayers to be eligible to claim this credit, the SECURE Act 2.0 also adjusts and expands the phase-out ranges. Additionally, after 2027, the phase-outs for income will be adjusted for inflation.
Benefits for Individuals Making Student Loan Payments
The SECURE Act 2.0 includes a provision to assist employees who feel they may not be able to save for retirement because they are overwhelmed with student debt. To make sure these individuals are not missing out on available matching contributions from their retirement plans, the SECURE Act 2.0 allows such employees to receive those matching contributions by reason of repaying their loan. An employer is permitted to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to “qualified student loan payments.”
A qualified student loan payment is broadly defined as “any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.” Governmental employers are also be permitted to make matching contributions in a section 457(b) plan or another plan with respect to such repayments. This benefit is effective for contributions made for plan years beginning after December 31, 2023.
The SECURE Act 2.0 includes several other provisions meant to expand participation and boost retirement savings, such as:
- Eliminating an actuarial test in the regulations relating to RMDs that limits the use of certain annuities in defined contribution plans and IRAs – the modification makes it possible for participants to make elections to use annuities that provide only a small financial benefit but important guarantees. (Effective for calendar years after 2022)
- Allowing SIMPLE IRAs to accept Roth contributions and granting the ability to treat employee and employer simplified employee pension contributions as Roth contributions (Effective for tax years after 2022)
- Allowing employers to give employees de minimis low-cost incentives, like gift cards, to incentivize employee contributions to qualified plans (Effective for plan years beginning after 2022)
- Permitting beneficiaries of Sec. 529 college savings accounts to make direct trustee-to-trustee rollovers from a Sec. 529 account to a Roth IRA without tax or penalty. The Sec. 529 account must have been in existence for over 15 years at the time of the rollover, and aggregate rollovers cannot exceed $35,000. Rollovers are also subject to the Roth IRA annual contribution limits. (Effective for distributions made after December 31, 2023)
In summary, the SECURE Act 2.0 has many provisions aimed at helping Americans of all ages save for retirement. There are also a number of other provisions not discussed in this article that may be relevant to you. A recent article in the Journal of Accountancy provides more details about many other aspects of the new legislation.
The changes under the provisions of the SECURE Act 2.0 may affect your retirement plan contribution and distribution options. If you need assistance with any tax issues related to retirement plans, please contact GYF at 412-338-9300.