The SECURE 2.0 Act of 2022 (the Act) was signed into law by President Biden on December 29, 2022 as part of the Consolidated Appropriations Act of 2023. The bipartisan legislation is a conglomeration of one House and two Senate bills that have been floating around Congress throughout 2022, if not earlier. Designed to expand the nation’s retirement plan coverage, with its 90-plus provisions, the Act is the most substantial piece of retirement legislation in many years.
Most of the Act’s provisions are intended to enhance coverage and participation in 401(k) and similar-type plans, such as a 403(b), particularly among small businesses that currently do not offer a retirement plan and industries that employ large swaths of part-time workers. There are some other provisions that apply to cash balance defined benefit plans and many others that impact all types of retirement plans.
Below is part one of our five-part blog series on the Act. Be sure to bookmark www.bpas.com/blog!
Highlights of the SECURE Act 2.0
- New “Starter K Plan” allowing employers without a retirement plan to offer a starter 401(k) plan or safe harbor 403(b) plan
- Increased tax credit for new plans
- Enhanced Saver’s match that changes existing tax refund to a government matching contribution into the taxpayer’s plan
- Side-car emergency savings accounts in defined contribution plans
- Student-loan matching program that treats student loan payments as elective deferrals for purposes of matching contributions
- Higher catch-up limits at age 60, 61, 62 and 63
- Increase age for required minimum distributions (RMD) to age to 73 currently and then to age 75 ten years later
- Increase the current qualified longevity annuity contract (QLAC) limits
- Auto-portability provisions
- Establishment of a Retirement Savings Lost and Found
- Expand the Employee Plans Compliance Resolution System (EPCRS)
- Reform the family attribution rules
A Deeper Dive: Provisions that expand retirement plan coverage, facilitate new plans, and increase employee savings.
|New Plans Require Automatic Enrollment and Escalation Provisions
|Date of enactment
|For plan years beginning after December 31, 2024, any 401(k) or 403(b) plan established after December 29, 2022 must contain an automatic enrollment provision and an automatic escalation provision (with employee opt out). These rules do not apply to governmental or church plans or plans sponsored by new and small businesses.
|Starter 401(k) Plans
|Beginning in 2024
|Employers who do not sponsor a retirement plan may implement a deferral-only Starter 401(k) plan, a simplified plan with lower contribution limits.
|Saver's Matching Contributions
|Tax years beginning after 2026
|Instead of a tax credit refund on their return, lower-income retirement savers will be eligible for a government-funded matching contribution to their IRA or retirement plan for 50% of their contributions (with income-level phase out), up to a maximum of $2,000, reduced by certain distributions taken by the individual.
|Catch-Up Contribution Increase at Later Ages
|Tax years beginning after 2024
|Catch-up contributions will be increased to the greater of $10,000 or 150% of the age 50 catch-up contribution amount for employees who reach the ages of 60, 61, 62, or 63 during the year.
|Catch-Up Contributions Roth Requirement
|Tax years beginning after 2023
|Catch-up contributions to 401(k), 403(b), and governmental 457(b) plans by employees whose wages exceed $145,000 (as indexed) must be made on a Roth basis. This Roth treatment of catch-up contributions is mandatory for any plan that makes catch-up contributions available.
|Optional Employer Contributions as Roth
|Contributions made after date of enactment
|Plans may offer employees the ability to elect some, or all matching or non-elective employer contributions to be characterized as Roth contributions, if contributions are fully vested at the time they are made.
|Matching Contributions on Student Loan Payments
|Plan years beginning after 2023
|401(k), 403(b), and governmental 457(b) plan sponsors may make matching contributions to employees for certain qualified student loan payments made by employees for higher education expenses and treat them as regular matching contributions for nondiscrimination testing purposes.
|De Minimis Incentives to Participate
|After date of enactment
|Currently, matching contributions are the only permitted incentive employers have for encouraging plan participation. After the date of enactment, employers may provide de minimis financial incentives, such as gift cards of a modest amount, provided such incentives are not paid for with plan assets.
|Coverage for Long-Service Part-Time Employees
|Plan years beginning after December 31, 2024
|The original SECURE Act required that employees with at least 500 hours of service in each of three consecutive years (beginning in 2021) be permitted to make elective deferrals to an employer's 401(k) plan with no requirement for an employer to provide matching or other employer contributions. These part-time employees could become 401(k)-eligible as early as January 1, 2024. After December 31, 2024, the eligibility requirement is reduced from three to two years; but it excludes years of eligibility service prior to 2023, and includes 403(b) plans. Under the new rule, part-timers could be eligible as early as January 1, 2025 (does not change previous eligibility in 2024 under the original rule).
|Plan Based Emergency Savings Accounts
|Plan years beginning after December 31, 2023
|Sponsors of individual account plans may create emergency savings accounts that permit non-highly compensated employees to make Roth-type contributions to a special savings account within the retirement plan. Emergency savings must be available for withdrawals at least once per month. Contributions may not be made if, or after, the account would exceed $2,500 (adjusted for inflation after 2024) or a lesser amount defined by the plan sponsor. Employee emergency-savings-account contributions must be eligible for matching contributions at the same rate as elective deferrals under the plan but such matching contributions are not made to the emergency savings account.
|Tax Credits for Small Employers
|Date of enactment
|Currently, employers with fewer than 100 employees that adopt a new retirement plan may qualify for an annual tax credit for up to three years equal to 50% of the administrative cost of establishing the plan, limited to $5,000. The percentage is increased for 2023 from 50% to 100% for employers with 50 or fewer employees. It also establishes a new tax credit for contributions made by small employers to a newly established defined contribution plan. The new tax credit will be a set percentage of the amount contributed by the employer up to a per-employee cap of $1,000, excluding contributions to employees with compensation in excess of $100,000, as indexed. The set percentage is 100% for the year the plan is established and the following year, 75% for the third year, 50% for the fourth year, 25% for the fifth year, and 0% thereafter. The full amount of the new tax credit would be available to employers with 50 or fewer employees, but phases out for employers with 51 to 100 employees.
|Retroactive 401(k) Start-Up for Sole Proprietors
|Date of enactment
|Unincorporated sole proprietors without employees may retroactively adopt 401(k) plans by their (extended) tax return due dates and make retroactive salary deferrals. (Doesn’t apply to sole proprietors or partners with employees.)
|Retroactive Amendments to Increase Benefits
|2024 plan years
|Employers may retroactively adopt, by their (extended) tax return due dates, amendments that increase benefits.
|Mid-Year SIMPLE Replacement
|Employers may terminate their SIMPLE plans and replace them with safe harbor 401(k) plans during the year. Contribution limits are coordinated for the transition/replacement year.
|IRA Catch-Ups Contributions Index
|The $1,000 IRA catch-up contribution will be indexed for cost of living increases.
In next week’s post, we’ll take a look at provisions impacting retirement plan distributions. Questions or concerns about the new legislation? Contact your financial advisor or BPAS Participant Services.