Quick look: In late December 2022, the final SECURE Act 2.0 details were ironed out by Congress, and the Act was signed into law. SECURE Act 2.0 includes a variety of features designed to help Americans save for retirement and assist SMBs in offering retirement savings plans to their employees. Here are the major changes employers and brokers can expect.
SECURE Act 2.0, an extension of the original 2019 SECURE Act, aims to increase Americans’ retirement security and access to workplace savings by making it easier for them to contribute to their retirement savings plans. Additionally, it is designed to provide financial relief to small businesses that want to offer these important benefits.
Important SECURE Act 2.0 details
From increased catch-up contribution limits to a myriad of Roth plan updates, here are the key SECURE Act 2.0 details small- and medium-sized businesses (SMBs) and brokers should note.
Increased catch-up contribution limits
One of the most notable features of SECURE Act 2.0 is its catch-up contribution updates. Under the Act, age-50 catch-ups will remain, and some new catch-ups will be added:
- 401(k) and 403(b) plans: Beginning in 2025, the catch-up contribution limit will become the greater of $10,000 or 150% of the catch-up limit for individuals between ages 60-63. And starting in 2026, the catch-up contribution will be indexed by inflation.
- IRAs: The $1,000 catch-up contribution limit will be indexed for inflation for tax years starting in 2024.
Required minimum distribution (RMD) updates
For the second time since 2019, SECURE Act 2.0 will increase the required minimum distribution (RMD) age. The Act defines that the age when retirees must begin drawing from their non-Roth, tax-deferred retirement accounts would rise from age 73 in 2023 to age 75 in 2033. It should be noted that people who have already started RMDs cannot stop.
Another RMD-related change under SECURE Act 2.0 is that starting in 2024, Roth 401(k) plans will be freed of mandatory distributions. While the current penalty for missing an RMD is 50%, the Act will halve this to 25%, and if promptly corrected, the penalty may be reduced to 10%.
401(k) matching contributions based on student loan payments
Notably, SECURE Act 2.0 allows employers to make matching contributions to an employee’s 401(k) and 403(b) retirement plan (even if the worker isn’t contributing).
This change is designed to reduce stress for workers who cannot afford to simultaneously pay off their student loans and save for retirement by having a portion of their student loan payment matched by their company and contributed to their retirement plan.
529-to-Roth IRA rollover changes
The Act also permits tax- and penalty-free rollovers from 529 college savings plans to Roth IRAs. Some limitations apply, including:
- The lifetime rollover limit is $35,000, and beneficiaries must move funds between a 529 plan and Roth IRA in their name
- The 529 account must have been opened for more than 15 years
- Conditions are subject to ordering rules and Roth contribution limits
Boosted qualified charitable distribution limit
Under SECURE Act 2.0, beginning in 2023, the previous $100,000 limit for qualified charitable distributions will be indexed by inflation. Qualified charitable distributions allow taxpayers aged 70.5 and older to contribute to charity from their IRA and avoid the recognition of income on the donated amount. The Act also allows one-time gifts of $50,000 through a charitable trust or gift annuity.
More Roth updates
SECURE Act 2.0 also includes the following updates for Roth accounts:
- SEP and SIMPLE retirement plan participants may have the option for contributions and employer funding to be treated as Roth starting in 2023 (previously, they couldn’t have a designated Roth IRA account)
- Participants could be required to make catch-up contributions to a Roth account in 401(a), 403(b), and 457(b) plans starting in 2024 (an exception exists for workers earning less than $145,000)
- Employers may allow workers to elect matching contributions in a Roth account versus pre-tax
Streamlined 401(k) rollover protocol
While it may not be finalized until 2025, SECURE Act 2.0 aims to improve the direct rollover process by requiring the Treasury Secretary to standardize the process using sample forms.
Required 401(k) auto-enrollment
Slated to go into effect after December 31, 2024, the Act would require most employers starting new workplace retirement savings plans to automatically enroll employees (something that was previously optional). It would then be the employee’s responsibility to opt out if desired.
The provision would require employers have a default contribution rate of at least 3% (but not more than 10%) for the worker and an automatic contribution increase of 1% per year (up to a maximum rate of at least 10% but not more than 15%).
Additional emergency fund access for employees
SECURE Act 2.0 has built-in support for employees facing emergencies.
While traditionally, if you withdraw 401(k) funds before age 59.5, you had to pay taxes on the money and a 10% early-withdrawal penalty, under the Act, employees can make a penalty-free withdrawal of up to $1,000 per year for emergency purposes.
It should be noted that workers will still owe income tax on the withdrawal, but they could get that tax refunded if they repay the withdrawal within three years. If the withdrawal isn’t repaid, they must wait until the three-year repayment period ends before making another emergency withdrawal.
More assistance for low-income and part-time workers
Two provisions are included in the Act designed to assist low-income and part-time workers:
- Saver’s Credit update: Eligible mid- and low-income people may get a matching contribution from the federal government worth up to 50% of their savings, but the match cannot exceed $1,000. This change would go into effect after December 31, 2026.
- Part-time worker retirement changes: SECURE Act 2.0 will reduce the service time required to participate in a workplace retirement plan from three to two years (with at least 500 hours worked per year). This update is scheduled to go into effect after December 31, 2024.
The backbone of SECURE Act 2.0 is enabling SMBs to offer better retirement savings opportunities to their employees. To support this, two major incentives are included in the Act:
- Starter K Plan: This plan allows employers that do not currently offer a retirement plan to sponsor a start 401(k) plan (or safe harbor 403(b) plan). According to the American Retirement Association, “The Starter K plan does not require employer contributions or complicated testing. It only requires that workers be automatically enrolled in the plan at a minimum of 3% of pay and provides the ability for workers to opt-out. The Starter K plan with automatic enrollment becomes the perfect option for a small or start-up business that is not able to contribute to a retirement plan today but wants to give its valued workers and opportunity to save for their retirement.”
- A 100% tax credit for new retirement plans, an increase from the previous 50% credit. Also, the companies may have up to 100 employees (an increase from the prior 50-employee limit), with a per-employee cap of $1,000.
A partner to help you navigate SECURE Act 2.0 details (and so much more)
New HR and employee benefits laws seem to appear every week. Staying aware of what they entail, and ensuring you’re offering the right benefits, can be time-consuming for the many brokers and SMBs that find themselves stretched thin.
A professional employer organization (PEO) can help. For example, ExtensisHR provides a wide range of employee benefits designed to comply with the latest regulations and meet the modern workforce’s financial wellness needs. These benefits include access to 401(k) retirement plans, 529 education savings plans, financial wellness options, and training on investing, budgeting, and more.
Additionally, the HR experts at a PEO can ensure SMBs remain compliant with these new changes and provide protection from potential liability, assist with questions or concerns, and make recommendations for how to handle matters related to SECURE 2.0.
It’s critical for SMBs and brokers to stay one step ahead of retirement savings regulations and feel confident they’re offering the most competitive benefits to their employees (or clients). Contact the experts at ExtensisHR today to simplify the process.