SECURE 2.0 Act of 2022 Brings in Sweeping Reforms: What You Need to Know

Retirement savings plans saw major shift as a result of the SECURE Act of 2019, which inspired more Americans to start saving for the long term. To further assist Americans in saving through employer-sponsored programs, the SECURE 2.0 Act, which was signed into law by President Biden on December 29, 2022, has now incorporated additional features.

Several provisions will be implemented over the following few years, though some went into force on January 1, 2023. However, it’s crucial for plan sponsors and participants to comprehend both the current plan adjustments and benefits as well as any prospective future effects.

Those who are affected may take immediate action to ensure compliance by adjusting their retirement plans to comply with the new law. A list of specific provisions with potentially broad application is provided below.

Automatic Enrollment

From December 29, 2022, onward, employers who initiate new retirement plans will have to comply with a new regulation. This mandates automatic enrollment of employees in their retirement plans at a rate of no less than 3%, and no more than 10% of eligible wages starting in 2025. Retirement plans must ensure as well that contributions are raised to a minimum of 10%, but not exceeding 15% of pay.

If the participants are automatically enrolled, they must be given the provision to withdraw their contributions and opt-out of the plan within 90 days without being charged the 10% early withdrawal penalty. However, it’s important to note that new companies with less than three years in business and employers with ten or fewer workers are exempt from this requirement.

Automatic Escalation

As of 2025, newly established retirement plans initiated after December 29, 2022, will be required to raise contribution percentages by 1% on the first day of each plan year, once a year of service is completed. This should continue until the contribution percentage reaches a minimum of 10%, but not exceeding 15% of eligible wages. However, exceptions apply to governmental and church plans, as well as businesses with 10 or fewer workers, and employers that have been operating for less than three years.

Expanded Catch-Up Contributions

Commencing in 2023, 401(k) account holders who are 50 years of age and above will be allowed to make an additional annual contribution of $7,500. By 2025, this figure will rise to $10,000 per year (indexed for inflation) for those aged 60 to 63. Furthermore, subsequent to 2023, all catch-up contributions made by account holders earning over $145,000 yearly must be on a Roth (after-tax) basis.

Employer Contributions May Be Optionally Treated as Roth Contributions

Employers can now take immediate action to modify their plans, allowing employees to opt for their employer matching and non-elective contributions to be made as Roth (after-tax) contributions. However, they must be entirely vested at the point of contribution to the plan. Further directives are anticipated in due course.

Long Term, Part-Time Employees

The prior SECURE Act established a condition wherein long-term, part-time employees who completed 500 to 999 working hours for three years consecutively were qualified to participate in their employer’s retirement plan. The new legislation has shortened this requirement to two years, starting in 2025, thereby enabling employees to commence saving for their future at an earlier stage. However, this provision is not applicable to workers who are part of collectively bargained plans or nonresident aliens.

Student Loan Payments

Student loan payments will be accepted as retirement contributions beginning in 2024, making them eligible for workplace retirement account matching contributions. Employees who are repaying student loans rather than investing for retirement can have their contributions allocated to the business retirement plan. In this regard, employers may depend on their employees to annually certify the amount of their qualifying student loan payments.

Emergency Savings Account Linked to Retirement Plans

Starting in 2024, retirement plans can offer emergency savings accounts linked to Roth (after-tax) contributions. The savings account balance must be available for distribution at least monthly and be penalty-free and unsubstantiated. Employers may enroll employees automatically, with contributions limited to 3% of eligible wages. The employee may opt-out, and contributions stop when the balance reaches $2,500 or a lesser amount set by the employer. No employer contributions are allowed. Contributions are eligible for the same matching contributions as elective deferrals. Upon termination, funds may be converted to another Roth account within the plan or distributed to the participant. The Treasury Department and/or the Department of Labor may provide guidance on this provision.

Emergency Expenses

Pursuant to the recently enacted legislation, plan participants will generally have the ability to withdraw up to $1,000 annually from their retirement savings account to cover unforeseen expenses without incurring the 10% early withdrawal tax penalty if they are below 59½ years of age. The recipient of the distribution retains the right to repay it within a three-year timeframe. It should be noted that no further emergency distributions can be made during the three-year repayment period until any previously withdrawn amounts have been fully repaid. Furthermore, companies have the option of facilitating the establishment of an emergency savings account through automatic payroll deductions for their employees.

Saver’s Match

Commencing from 2027, employees with lower incomes will be entitled to obtain a federal matching contribution amounting to a maximum of $2,000 annually, which will be directly deposited into their retirement savings account. This matching contribution is equivalent to 50% of the employee’s contributions, albeit with a phasing out mechanism as the employee’s income rises. For instance, the threshold for phasing out lies within the range of $41,000 to $71,000 for married individuals filing jointly, and $20,500 to $35,500 for single taxpayers, among other applicable income brackets. It is noteworthy that this matching contribution will be replacing the extant Saver’s Credit.

Required Minimum Distributions (RMDs)

Effective from 2023, the age for triggering Required Minimum Distributions (RMDs) shall be raised from 72 to 73, and subsequently to 75 by 2033. Moreover, the current penalty for failing to withdraw RMDs shall be halved from 50% of the requisite amount to 25%, and then to 10% if rectified within two years.

Immediate Incentives for Participation

Presently, employers may only furnish matching contributions as a motivation for workers to enroll in a retirement savings plan. However, for plan years that initiate after 2022, employers can provide minor pecuniary incentives, including gift cards, to encourage participation. It is imperative to note that such incentives should be of de minimis value and must not be disbursed from plan assets.

Start-Up Tax Credit

At present, employers with fewer than 100 employees may be qualified to receive a start-up tax credit amounting to 50% of administrative costs, subject to an annual ceiling of $5,000, over a period of three years. In comparison, SECURE 2.0 enhances this credit by doubling it to cover 100% of eligible start-up expenses for employers that have up to 50 employees. Moreover, employers with up to 50 employees may be entitled to a supplementary credit of up to $1,000 per worker for qualified employer contributions, with a phase-out threshold commencing from 51 employees to 100.

Retirement Savings “Lost & Found”

The legislation creates an electronic, readily accessible database, to be launched within two years after the Act becomes effective, enabling participants or beneficiaries to investigate and retrieve contact details for plan administrators of plans that they may be eligible to receive benefits from. Subsequently, starting in 2025, the plans will be mandated to provide details to the Department of Labor to include in the database.

Error Corrections

The legislation broadens the self-correction mechanism termed as the Employee Plans Compliance Resolution System (EPCRS) to enable internal correction of more categories of errors and to exempt specific noncompliance in making required minimum distributions from the excise tax. Moreover, new regulations have been introduced for rectifying overpayments. These enhancements are in force immediately upon enactment.

The SECURE 2.0 Act incorporates approximately 90 alterations to the retirement savings plans that necessitate careful consideration to determine their relevance. Certain provisions may demand the revision of the current retirement plans and offerings. To identify the required modifications and assess optional provisions that could be advantageous, it is crucial for employers to consult with qualified legal and financial advisors.