SECURE 2.0 Act is Now Law: Here’s a Breakdown of the Most Notable Provisions Set to Enhance How American’s Save for Retirement

Updated 3/14/23: This article has been updated to change the required minimum distribution ages in accordance to IRS Notice 2023-23.

At a glance

• Main takeaway: The SECURE (Setting Every Community Up for Retirement Enhancement) 2.0 Act passed Congress and was signed into law by President Biden on December 29, 2022.
• Impact on your business: Now that the SECURE 2.0 Act has passed, it’s important to understand all the provisions within the new legislation and how they may impact individuals and businesses.
• Aprio’s Retirement Plan Services team can help you navigate and modify your current plan to meet or take advantage of the new requirements.

Schedule a complimentary plan review with our Retirement Plan Services team today.

The full story:

Congress made big moves before breaking for the holidays with the passing of the SECURE 2.0 Act. The new legislation, which passed on December 23, 2022 and is included in the Consolidated Appropriations Act of 2023, is expected to strengthen and enhance the way American’s save for retirement.

Now that SECURE 2.0 has been signed into law we summarized the most notable provisions with the biggest impact below.

Expanding coverage and increasing retirement savings:

• Expanding automatic enrollment in retirement plans will now require new 401(k) and 403(b) plans to include EACA at 3% (no more than 10%) auto deferral with an annual auto increase of 1% to 10%, not exceeding 15%, and will be effective for plan years after December 31, 2024. This new requirement does not apply to SIMPLE plans, plans adopted before the effective date, government or church plans, plans sponsored by businesses in existence for less than three years, or plans maintained by employers with 10 or fewer employees.

• The small employer pension plan startup credit will increase the credit allowed for small employers from 50% of startup costs to 100% for employers with up to 50 employees, effective for taxable years after December 31, 2022. Furthermore, it provides an additional credit, except for defined benefit plans, for employer contributions with a per-employee cap of $1,000. It’s important to note that there are dollar limitations and a phase-in of the credit. The credit is also available to eligible employers if they adopt an existing plan, such as MEP or PEP.
  
• The savers credit enhancement has changed from a cash payment from a tax refund to a federal matching contribution of 50% up to $2,000 that must be deposited into a taxpayer’s IRA/retirement plan. The match has a phase out and is subject to inflation adjustments on an annual basis. This will change will be effective for taxable years after December 31, 2026.
  
• Adjustments to 403(b), MEPs and PEPs will now allow 403(b) plans to participate in multiple employer plans (MEP) or pooled employer plans (PEP). This change will become effective for plan years after December 31, 2022.
  
• The required minimum distributions (RMD) age for retired participants to begin taking minimum distributions from their qualified plans has been updated by the IRS. According to IRS Notice 2023-23, an IRA owner who turns 72 in 2023 must begin taking RMDs on April 1, 2025, instead of April 1, 2024. This delay means that IRA owners who turn 72 this year will not have an RMD due from their IRA for 2023. Additionally, surviving spouses can elect to be treated as the deceased employee for RMDs, and special needs trusts for disabled beneficiaries may provide for a charitable organization as the remainder beneficiary. These changes will be effective for the calendar year after December 31, 2023.
  
• IRA catch-up limit indexed and subject to a COLA adjustment. This change will be effective for taxable years beginning after December 31, 2023.
  
• Increasing catch-up limits within plans by raising the COLA adjusted $5,000 ($7,500 for 2023) catch-up limit to the COLA adjusted $10,000 for participants who have attained the age of 60, 61, 62 and 63, but not age 65, before the close of the taxable year. This adjustment will become effective for taxable years after December 31, 2024.
  
• Matching contributions for student loan repayments will allow employers to match contributions into their qualified retirement plans, such as 401(k), 403(b) and SIMPLE IRA, for employee repayments made on qualified student loans for higher education. Governmental employers are also permitted to participant with a 457(b) or another plan with respect to such repayments. This change will become effective for plan years after December 31, 2023.
  
• Military spouse retirement plan eligibility credit for small employers will provide $200 per military spouse (non-HCE) plus 100% of employer contributions (up to $300) made on behalf of the military spouse (maximum of $500) credit for small employers. This change will become effective after the enactment of the Act.
  
• Small financial incentives for contributions gives plan sponsors the option to provide small incentives (like gift cards) to employees to spur employee deferrals. This change will become effective after the enactment of the Act.

• Withdrawals for emergency expenses does not apply the 10% excise tax to distributions used for emergency expenses, which are unforeseeable or an immediate financial need (personal or family emergency expenses). One distribution per year up to $1,000 is allowed and repayable within three years (no additional emergency distributions will be allowed during this period unless repayments are made). This will become effective for distributions after December 31, 2023.

• SIMPLE plans will allow employers to make additional contributions to each employee in uniform manner and cannot exceed lesser of 10% of compensation or $5,000 (indexed). The catch-up contribution at age 50 increased by 10% for employers with no more than 25 employees, while employers with between 26-100 employees can provide higher deferral limits but only if they provide a 4% match or 3% nonelective contribution. This will become effective for taxable years after December 31, 2023.

• Nontrade/business SEP provides domestic employees (e.g., housekeeper) with retirement benefits under a simplified employee pension (SEP) and is effective for taxable years after the enactment of the Act.

• Automatic portability allows a service provider to provide plans with automatic portability services, including the automatic transfer of a participant’s default IRA (from a prior plan distribution) into the new employer’s plan unless the participant opts out. This will become effective 12 months after the enactment of the Act.

• Starter plans gives employers who do not offer a retirement plan the ability to offer a starter 401(k) or safe harbor 403(b) plan. This will include an auto enrollment at 3% to 15% with an annual limit same as an IRA contribution limit with additional catch-up beginning at age 50. This will become effective for plan years after December 31, 2023.

• Safe harbor for employee’s elective deferral failures if an error (auto enroll or escalation) is corrected within 9 ½ months after the end of the year in which the error occurred. This will become effective for errors after December 31, 2023.

• Long-term part-time eligibility accelerated changed the eligibility from three consecutive years of 500 hours worked to two consecutive years. Also, it extends the long-term part-time coverage rules to 403(b) plans that are subject to ERISA. This will become effective for plan years after December 31, 2024.

• The ability to rollover a 529 plan to a Roth IRA provides tax- and penalty-free rollovers of unused dollars (up to $35,000) from 529 accounts to Roth IRA over the lifetime of beneficiaries. Certain conditions will apply, such as the subject of Roth IRA annual limits and the 529 accounts must have been open for more than 15 years. This change will become effective for distributions after December 31, 2023.

• Emergency savings accounts gives employers the option to offer non-HCEs emergency savings accounts that are linked to their retirement plans. An emergency savings account can be auto enrolled up to 3% with a cap of $2,500. It’s important to note that contributions will receive Roth tax treatment and are included in determining matched contributions. No fees or penalties will be charged to the first four distributions.

Simplification and clarification of retirement plan rules:

• Recovery of retirement plan overpayments will relieve fiduciaries from seeking inadvertent benefit overpayments, but if they do so, the Act puts rules in place. A few of the most notable rules, include no interest or additional amounts can be sought, if repaid in installments the aggregate cannot exceed the amount of the overpayment and the consideration of hardship imposed on the recipient. Failure to obtain repayment does not impact the qualified status of the plan. This will become effective with the enactment of the Act.
  
• A reduction in excise taxes has been imposed from 50% to 25%for failure to take RMDs and can be further reduced to 10% if corrected during the provided correction window. This will become effective for taxable years after the enactment of the Act.

• The DOL has been directed to create a national lost and found online database for retirement plans. The database must be created no later than two years after the enactment of the Act.

• The elimination of certain notices, disclosures and plan documents would not have to be provided to unenrolled employees if they are given an annual reminder of their eligibility with the election deadlines and any document they request, to which they are entitled to receive. The employee must also be provided with a summary plan description. This will become effective for plan years after December 31, 2022.

• The increasing cash-out limit will change from $5,000 to $7,000 and will become effective for plan years after December 31, 2023.

• Top heavy tests for excludable employees may be performed separately and will become effective for plan years after December 31, 2023.

• Repayments for qualified birth or adoption distributions are restricted to three years and will become effective retroactively to the three-year period beginning at the date of distribution.

• Hardship withdrawals have been changed to mirror 401(k) rules allowing administrators to rely on employee certifications of hardship requirements. This will become effective for plans years after December 31, 2023.

• Domestic abuse distributions will be allowed penalty-free from plans for domestic abuse victims equal to the lessor of $10,000 or 50% of the account balance. Distributions may be repaid over three years. This will become effective for distributions after December 31, 2023.

• An increase to benefit accruals plans may be amended to allow for an increase in participants’ benefits but by the due date of the employer’s tax return. This will become effective for plan years after December 31, 2023.

• Terminal illness distributions will be allowed penalty-free for individuals and will become effective after the enactment of the Act.

• SIMPLE to safe harbor will allow employers to replace a SIMPLE IRA with a SIMPLE 401(k) or other 401(k) with required employer contributions during the plan year. This will become effective for plan years after December 31, 2023.

• A cash balance allows plan sponsors to provide larger pay credits to older employees with longer service. This will become effective for plan years after the enactment of the Act.

Revenue provisions:

• All catch-up contributions will be subject to Roth treatment unless the employee has a compensation equal to or less than $145,000 indexed. This will become effective for taxable years after December 31, 2023.

• The treatment of matching or contributions as a Roth will provide participants with the option of matching contributions on deferrals or student loan repayments to be treated as Roth contributions, including taxability. This will become effective after the enactment of the Act.

• The sunset for retiree health benefits has been extended to the end of 2032 on the ability of the employer to use assets from overfunded pension plans to pay retiree health and life insurance.

The bottom line

Now that the SECURE 2.0 Act has passed, it’s important to understand all the provisions within the legislation and how they may affect individuals and businesses. Aprio’s Retirement Plan Services Practice is ready to help your business and/or employees navigate and modify your current retirement savings plan to meet or take advantage of the new requirements.

Related Resources/Assets/Aprio.com articles/pages

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Now that SECURE 2.0 Act has been signed into law, Aprio’s advisors can help you understand how the provisions will impact retirement savings plans for businesses and individuals. Schedule a consultation today!