President Biden signed the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0) on December 29, 2022. It's a critical part of the omnibus funding package that builds on the retirement-saving opportunities provided by the original SECURE Act of 2019.
A lot of attention has been given to how the new law changes the rules for required minimum distributions and catch-up contributions. But SECURE 2.0 contains additional retirement-saving provisions that you might not be aware of. Here are some lesser-known, but important, improvements that could benefit you.
Employer-sponsored 401(k) plans and 403(b) retirement plans can allow employees to make salary-reduction contributions (also called elective-deferral contributions). These plans can enroll employees for automatic salary-reduction contributions based on a predetermined percentage of salary — unless the employee opts out or elects a different contribution percentage.
SECURE 2.0 stipulates that new 401(k) and 403(b) plans must call for automatic contributions of at least 3%, but not more than 10%, of salary during an employee's first year of participation — unless the employee opts out.
Effective on the first day of each plan year after an employee has completed one year of participation, the contribution percentage must automatically increase by 1% to at least 10%, but not more than 15%. For plan years ending before 2025, the maximum contribution percentage is 10%.
The employee can select an investment option. If the employee makes no selection, automatically contributed amounts must be invested in accordance with U.S. Department of Labor rules.
Important: Automatic enrollment isn't required for plans established before the date that SECURE 2.0 became law (December 29, 2022). Automatic enrollment also isn't required for SIMPLE 401(k) plans, governmental or church plans, any plan maintained by an employer that has been in existence for less than three years, and any plan maintained by an employer with 10 or fewer employees.
Under the original SECURE Act of 2019, for plan years beginning in 2021, 401(k) plans must generally allow an employee to make salary-reduction contributions if the employee has worked for the employer for at least 500 hours per year for at least three consecutive years and has met the minimum age required for participation. These workers are called "long-term part-time" employees. Once a long-term part-timer meets these requirements, the employee must be permitted to begin participation in the plan no later than the earlier of:
SECURE 2.0 reduces the three-consecutive-year rule to two years, effective for plan years beginning after 2024. The new law also extends the long-term part-time employee rules to 403(b) plans that are subject to the Employee Retirement Income Security Act (ERISA).
Sole proprietors aren't employees, but they can still set up 401(k) plans to cover themselves. Then, sole proprietors can make 401(k) plan elective-deferral contributions that equal the 401(k) salary-reduction contributions that employees are allowed to make. For 2023, these amounts are:
Before SECURE 2.0, an elective-deferral contribution to a sole proprietor's 401(k) account always had to be made by no later than December 31 of the year for which the sole proprietor claimed a deduction for the contribution. SECURE 2.0 includes a favorable change that applies when an individual owns 100% of an unincorporated business and is the only person covered by a 401(k) plan established for that business.
Under the change, an elective-deferral contribution that's made by the deadline for filing the owner's personal tax return (without regard to any extension) for the tax year ending after or with the end of the first plan year is treated as having been made before the end of the plan's first year. Therefore, sole proprietors can deduct the contributions on their personal tax returns for that tax year. This change is effective for plan years beginning after December 29, 2022.
For example, Sally set up a new 401(k) plan for her sole proprietorship. The plan's first year started on January 1, 2023, and ends on December 31, 2023. She has until April 17, 2024, to make an elective-deferral contribution for the plan's initial year. If Sally meets that deadline, she can deduct the contribution on her 2023 tax return. However, this extended contribution deadline is available only for the first plan year. After that, Sally will need to make an elective-deferral contribution by December 31 of the year in question to deduct the contribution on the return for that year.
Important: If you run your business as a single-member (one owner) LLC, it's treated as a sole proprietorship for most federal tax purposes — unless you elect to treat the LLC as a corporation. If your single-member LLC is treated as a sole proprietorship, the aforementioned change presumably applies to your business. But the IRS is expected to issue guidance to clarify that matter.
Another SECURE 2.0 provision will allow employers to make contributions to 401(k), 403(b), SIMPLE-IRA and governmental 457(b) plans that match qualified student loan payments made by employees. In effect, this will allow employers to make matching contributions to accounts of employees who aren't themselves contributing to their accounts but who are instead paying down student loans.
If you're eligible, your employer will rely on you to certify how much you're paying on qualifying student loans each year. This change will take effect in 2024.
These are just few of the SECURE 2.0 retirement-saving provisions that affect individuals. Contact us if you have questions or want more information about how the new law might have an impact on your plans to save for retirement.
SECURE 2.0 allows eligible employees to self-certify that they've had an event that constitutes a hardship for purposes of taking retirement plan hardship distributions. This change is effective for plan years beginning after SECURE 2.0 became law (December 29, 2022).
However, you need to understand that all or part of a hardship distribution can be taxable. It can also get hit with the 10% early distribution penalty unless a specific tax-law exception applies. So, hardship distributions aren't a free lunch. Contact your tax advisor to discuss what qualifies as a hardship under current law and how it will be taxed in your situation.
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