SECURE 2.0 Act: New Provisions Expands Eligibility & Simplify Plan Rules

On December 29, 2022, President Biden signed the Consolidated Appropriations Act, 2023 into law. This legislation included in the SECURE 2.0 Act of 2022.

There are a number of provisions contained in SECURE 2.0 that expand the pool of eligible participants, encourage more participant participation, and simplify plan rules and administrative processes for administrators.

Required Minimum Distribution (RMD) Provisions

- Delayed RMD Age: The original SECURE Act raised the RMD age from 70.5 to 72. SECURE 2.0 will increase the age even further, along the following schedule:

• 73 beginning in 2023 (for individuals who reach age 72 after December 31, 2022 and age 73 before January 1, 2033)
• 75 beginning in 2033 (for individuals who reach age 74 after December 31, 2032)

- Reduction in Excise Tax on RMDs Not Taken: The penalty on not taking RMDs has been reduced from 50% to 25%.

- Exclusion of Roth Accounts from RMDs: Roth IRAs were already not subject to RMDs. SECURE 2.0 extended that exclusion to Roth accounts under 401(k), 403(b) and 457(b) plans.

- Broaden RMD Options for Surviving Spouses: Allow surviving spouses to elect to be treated as an employee in determining of RMDs from an employer-sponsored retirement plan.

Catch-Up Contribution Provisions

- Mandatory Roth Catch-up Contributions to Certain Highly Paid Employees: Any catch-up contributions made by participants over the age of 50 and earning more than $145,000 in FICA-eligible wages (subject to inflationary adjustments) will now be required to be made as Roth contributions.

• Effective Date: Plan Years after December 31, 2023

- Index Catch-up Amounts for IRAs: Currently the $1,000 catch-up contribution for IRA accounts is not indexed for inflation, but this will change with SECURE 2.0 and will allow for it to increase with inflation.

• Effective Date: Plan Years after December 31, 2023

- Increase Catch-up Contribution Limits for Certain Older Participants: Participants aged 50 – 59 will maintain the current catch-up contribution limits ($7,500 in 2023), but those participants aged 60 – 63 will be able to increase their catch-up contributions to the greater of $10,000 or 50% more than the normal catchup contribution, starting in 2025. This additional catch-up limit will be indexed for inflation, as is the normal catch-up limit.

• Note: For SIMPLE Plans, the catch-up limits will be increased to the greater of $5,000 or 50% more than the normal catch-up limit.
• Effective Date: Plan Years after December 31, 2024

New Plan Provisions

- Expansion of Small Employer Pension Plan Credit: The Act expands the small employer pension plan credit, which is now effectively calculated based on qualified start-up costs for the Plan’s first three years and employer contributions for the Plan’s first five years.

• Start-up Costs: Plans with 51-100 employees continue to have a credit available to them of 50% of start-up costs. However, SECURE 2.0 increases credits for small employers with 50 or fewer employees from 50% of start-up costs to 100% of start-up costs. The cap of $5,000 based on number of employees remains the same.
• Employer Contributions: Additionally, there is a credit for employer contributions made to participants making less than $100,000 (inflation-adjusted) in the first five years of a Plan’s life, with a per employee cap of $1,000. The credit timeline is as follows:

               ■  1st and 2nd years: 100%

               ■  3rd year: 75%

               ■  4th year: 50%

               ■  5th year: 25%

               ■  6th year and later: 0%

               ■  Note: There is a phaseout for employers with 50-100 employees, where the full credit is reduced by 2% multiplied by the number of employees in excess of 50.

• Effective Date: Plan Years after December 31, 2022

- Creation of Starter 401(k) Plans: Employers that do not have a qualified retirement plan are able to create deferral-only arrangements that allow participants to make deferrals. These plans are subject to IRA contribution limits and do not allow for employer contributions.

• Effective Date: Plan Years after December 31, 2023

- Required Mandatory Automatic Enrollment/Escalation: SECURE 2.0 requires that any new 401(k) and 403(b) plans include an automatic enrollment feature whereby employees are automatically entered into the Plan, withholding at least 3% of their pay. Plans will then increase the automatic deferral amount 1% annually until the employee reaches a limit of at least 10%, with a cap on automatic escalation of 15%. Participants could still opt out, but the default in such plans will be for them to contribute automatically.

• Effective Date: Plan Years after December 31, 2024

Existing Plan Provisions

- Allowed Roth Matching and Nonelective Contributions: Currently, employer matching and nonelective contributions must be made pre-tax regardless of whether participants make pre-tax or Roth contributions. With SECURE 2.0, participants will have the option of treating employer contributions as Roth. These contributions will then be taxable to the participant.

• Effective Date: Immediate

- Creation of Emergency Savings Accounts Under Defined Contribution Plans: A defined contribution plan may offer non-highly compensated participants an opportunity to contribute to an emergency savings account up to a maximum of $2,500. Contributions are made via a Roth contribution and the plan sponsor may automatically enroll participants at a maximum of 3% of their eligible compensation. The initial 4 withdrawals per plan year will not be subject to fees or charges and the unused amounts are portable.

• Effective Date: Plan years after December 31, 2023

- Authorized Student Loan Matching: Employers could potentially make 401(k), 403(b), 457(b) plans or SIMPLE IRA matching contributions based on employees’ student loan payments rather than their elective deferrals to their retirement accounts.

• Effective Date: Plan Years after December 31, 2023

- Expedited Part-Time Workers’ Participation: The original SECURE Act expanded eligibility for so-called long-term, part-time workers to be able to contribute to retirement plans if they have successive years with more than 500 hours but less than 1,000 with an employer. SECURE 2.0 will shorten the window from the original 3 years for eligibility to 2 years.

• Effective Date: Plan Years after December 31, 2024