What You Need to Know About The Secure Act 2.0

February 21, 2023

On December 29, 2022, President Biden signed into law the long-awaited Secure Act 2.0 of 2022 (Secure Act 2.0 or the Act), adding another round of major retirement plan changes to those made by the first Setting Every Community Up for Retirement Enhancement Act in 2019 (Secure Act 1.0). 

Plans have until the last day of the plan year, beginning on or after January 1, 2025 (2027 for governmental and collectively-bargained plans), to adopt the plan amendments required under the Secure Act 2.0, as well as those under the Secure Act 1.0 and other recent legislative changes. Compliance with the legislative changes, however, must begin based on the effective date of the applicable section. 

Key Takeaways

While this Alert highlights and summarizes many of the changes made by the Secure Act 2.0, below are a few key takeaways:

1. The required minimum distribution age will continue to increase from 72 to 73 this year and 75 in 2033. Plans must implement the age 73 change now. 

2. Starting in 2025 employers who establish 401(k) plans must automatically enroll all new employees into the plan at a contribution rate of at least 3%, with annual increases of 1%, unless the employee elects not to have contributions made.

3. Long-term part-time workers will be eligible to contribute to employer 401(k) plans after earning at least 500 hours of service in two consecutive plan years.

4. Participants may elect to have certain employer contributions treated as Roth contributions, while catch up contributions must be made on a Roth basis for participants with income over $145,000.

5. Funds in 401(k) accounts may be withdrawn under more circumstances without being subject to the 10% early distribution tax.



Expanding Coverage & Increasing Savings

1. Automatic Enrollment Required for all 401(k) and 403(b) Plans

For plan years beginning after December 31, 2024, all newly established 401(k) and 403(b) plans must automatically enroll all employees unless the employee affirmatively opts out. The initial contribution rate must be at least 3% but not more than 10%, and the contribution percentage must automatically increase by 1% each year until it reaches 10% (or up to 15% if the plan provides). Employees may opt out of the contribution rate increases. Small employers (10 or fewer employees), new businesses (those in business less than 3 years), church plans, and government plans are exempted from this provision.

The Secure Act 1.0 for the first time allowed for the creation of 401(k) multiple employer plans (MEPs).  As of 2023, employers will be able to participate in multiple employer and pooled employer 403(b) plans.  The automatic enrollment and contribution rate requirements also apply to newly established multiple employer plans (and new contributing employers to 401(k) plans).

2. More Increases to the Minimum Distribution Age

Like its 2019 counterpart, the Secure Act 2.0 again raises the required minimum distribution (RMD) age from 72 to 73 effective January 1, 2023, and then to 75 effective January 1, 2033. These changes must be implemented as of their respective effective date.   

3. Optional Roth Treatment of Employer Contributions

Beginning in 2023, plans that allow Roth 401(k) deferrals must allow employees the option to elect that some or all employer matching or other employer contributions made on their behalf be contributed on a Roth basis if the contributions are fully vested when made.

4. Changes to “Catch-Up” Contributions and Limits

In general, employees ages 50 and older are eligible to make an additional “catch-up” contribution up to a yearly statutory limit. In 2025, catch-up contribution limits will increase for employees ages 60 to 63 to the greater of $10,000 or 150% of the 2025 catch-up contribution amount. The regular catch-up amount and the $10,000 will thereafter be indexed for inflation.

In addition, for tax years after 2023, catch-up contributions to 401(k), 403(b), and governmental 457(b) plans by employees whose income exceeds $145,000 must be made on a Roth basis.

5. Increase in Contribution Limits for Savings Incentive Match Plan for Employees (SIMPLE) Plans

For employers with 25 or less employees, both elective deferral and catch-up contribution limits will increase by 10% of the limit that otherwise would apply for the plan year beginning after December 31, 2023. Employers with 26-100 employees may provide increased elective deferral limits if the employer increases the required employer contribution by 1%. In addition, employers with SIMPLE plans may make additional employer contributions to all eligible employees of up to the smaller of 10% of compensation or $5,000.

6. Matching Contributions for Low-Income “Savers” & Student Loan Payments

Beginning in tax years after December 31, 2026, certain employees will be eligible to receive federal matching contributions that must be deposited into a “saver’s” IRA or other retirement plan. The match is 50% of the employee’s contributions up to $2,000 per individual and is subject to a phase out as the employee’s income increases.

In addition, for plan years after 2023, an employer who has a 401(k), 403(b), or governmental 457(b) plan may be able to make a matching contribution to employees for “qualified student loan payments.”  Qualified student loan payments are defined as repayments for education loans incurred by the employee to pay qualified higher education expenses up to statutory limits. 

  1. Expanded Coverage for Part-Time Workers

The Secure Act 1.0 requires that employees with 500 hours of service in three consecutive years become eligible to make elective deferrals to the employer’s 401(k) plan. The employer is not required to make employer contributions. The Secure Act 2.0 shortens the eligibility requirement to two consecutive years for plan years beginning after December 31, 2024.

8. Small Employer Tax Credit

The Secure Act 2.0 increases the tax credit offered to employers with less than 50 employees who adopt a new retirement plan from 50% to 100% of the administrative costs of establishing the plan. There is also a new tax credit established for small employers based on a percentage of the amount contributed by the employer up to a cap of $1,000 per employee. The percentage is 100% for the year the plan is established and the following year, then reduced by 25% each year thereafter.

Changes Made to Retirement Plan Distributions

1. Emergency Savings Accounts Permitted

For plan years beginning after December 31, 2023, employers maintaining 401(k) and 403(b) plans may create “emergency saving accounts” that permit non-highly compensated employees to make contributions on a Roth basis to a savings account within the retirement plan. Balances in these accounts, which may not exceed $2,500 or a lesser amount established by the plan sponsor, are eligible for distribution at least once per month.

2. Emergency Withdrawals Allowed

Also starting for years after December 31, 2023, an emergency personal expense distribution may be taken from a retirement plan for unforeseeable or immediate financial needs relating to personal or family emergency expenses without being subject to the 10% tax on early distributions. Employees may only take one withdrawal a year up to a maximum of $1,000 and must be allowed to repay the amount.  Plan sponsors may limit subsequent distributions if the first distribution is not repaid.

3. Penalty Free Withdrawals for Cases of Domestic Abuse, Terminal Illnesses, & Qualified Federal Disasters

Effective for distributions starting in 2023, retirement plan distributions made to a participant who is otherwise eligible for a distribution and is “terminally ill” will not be subject to the 10% tax on early distributions. 

For distributions made after December 31, 2023, plans may permit participants who self-certify that they have experienced domestic abuse within the past year to withdraw a portion of their retirement plan account in an amount up to the lesser of $10,000 or 50% of the participant’s account. Withdrawals are not subject to the 10% tax on early distributions. 

In addition, effective for qualified disasters occurring on or after January 26, 2021, the Act establishes permanent rules permitting up to $22,000 in “qualified disaster recovery distributions” that are not subject to the early distribution tax. These distributions are eligible to be taken over three years and may be repaid to the plan.

4. Reduction of Excise Tax for Required Minimum Distribution Failure

For tax years beginning after December 29, 2022, the excise tax imposed on a failure to take a required minimum distribution (RMD) will be reduced from 50% to 25% of the missed RMD. 

Additional Significant Amendments

1. Retirement “Lost and Found” Created

The Secure Act 2.0 directs the Department of Labor (DOL) to create a national online searchable retirement savings “lost and found” database to be operational within two years of the Act’s enactment. The database is designed to allow a participant or beneficiary to search for contact information for administrators of plans in which they may have a benefit. Plans will be required to share certain information with the DOL.

2. Recovery of Overpayments

Under the Act, plan administrators may now choose not to recoup overpayments made to plan participants. If a plan does try to recoup an overpayment, it must follow certain rules, including not assessing interest or other additional amounts, not collecting from a beneficiary, limiting the annual recoupment amount to no more than 10% of the dollar amount of the overpayment, and not threatening litigation unless the plan reasonably believes it could prevail. In addition, the participant must be notified within three years of the first overpayment to be required to repay, except in cases of fraud.

3. Changes to the IRS Employee Plans Compliance Resolution System

The Employee Plans Compliance Resolution System (EPCRS) is expanded to allow for self-correction of additional failures, including inadvertent failures that occur despite the plan having procedures in place to comply with the provision violated. The amendment will also exempt certain failures to make RMDs from the otherwise applicable excise tax.

Practice Point

While there is much that has changed and most types of retirement plans are impacted, there are only a few provisions that employers and retirement plans need to implement now. Plan documents do not need to be formally amended until the end of 2025 (2027 for governmental and collectively bargained plans), although compliance with the various provisions of the law will be required over the next three years. 

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