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SECURE Act 2.0


The SECURE Act 2.0

by Nathan Wyatt
Nathan Wyatt, Investment Advisor
The SECURE Act 2.0 is comprehensive legislation that builds on the original SECURE Act, passed in 2019. SECURE 2.0 is intended to expand and increase retirement saving, especially for low-income and part-time employees. Below is a summary of many of the changes:

  • New 401(k) and 403(b) plans must have automatic enrollment and automatic escalation:  Effective for plan year beginning after December 31, 2024 , new 401(k) and 402(b) plans must automatically enroll employees when eligible (and do not opt out).  Automatic deferrals start at between 3% and 10% of compensation, increasing by 1% each year, to a maximum of at least 10%, but no more than 15% of compensation.  The new law does not apply to plans already established.

  • Roth elections for matching contributions: Effective immediately, participants may make a Roth election to employer matching contributions if it is allowed by their plan. If a Roth election is made, employees will pay taxes on the employer’s contributions.

  • Simple and SEP Roth IRAs:  Simple IRAs and SEP IRAs are now allowed to accept Roth employee contributions. Effective December 31, 2022.
  • Changes to Required Minimum Distributions (RMDs): SECURE 2.0 increases the age for RMDs to 73 (an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033), beginning on January 1, 2023, and to age 75 (an individual who attains age 74 after December 31, 2032) on January 1, 2033, for certain individuals.  In addition, it reduces or entirely eliminates the excise tax imposed for not taking RMDs.

    Starting in 2024, Roth accounts in employer-sponsored plans, such as 401(k) plans, will be exempt from the RMD rules while the participant is alive.  The excise tax imposed on participants for failing to take an RMD will decrease from 50% to 25%, with a further reduction to 10% if corrected within a two-year correction window.

  • 401(k) retirement plans: For distributions after December 31, 2023, the involuntary distribution threshold - in which employers can force employees no longer actively employed to take distributions from the plan- will increase from $5,000 to $7,000.

  • Increase in catch-up limits at age 60, 61, 62, and 63: Beginning December 31, 2024, age based catch-up limits will be increased to the greater of $10,000 or 50 percent more than the regular age 50 catch-up amount in 2025 (as indexed for inflation) for participants who have reached ages 60, 61, 62, and 63.  For 2023, the catch-up contribution amount is limited to $7,500 for most retirement plans and is subject to inflation increases.

  • Age 50+ catch-up contributions Roth-only for certain highly paid employees:  If a participant's wages subject to FICA in the previous year paid by the employer sponsoring the plan were more than $145,000 (subject to COLA in $5,000 increments), the participant may only contribute the catch-up as a Roth contribution.  Effective tax years after December 31, 2023. This doesn’t apply to self-employed (Schedule C or Schedule F) filers.

  • Qualified Charitable Distributions (QCDs) – IRA owners over age 70 ½ are permitted to make contributions from their IRA directly to charitable organizations up to $100,000 in 2023 without recognizing the QCD amount as income. Under the SECURE 2.0 Act the annual limit is now indexed for inflation.
  • 529 Rollovers:  529 accounts are used for college savings, but there's always the back-of-your-mind concern that maybe the child you're saving for won't pursue higher education. SECURE 2.0 allows you to roll the funds in a 529 account over to a Roth IRA after 15 years. The Roth IRA has to be for the beneficiary, and any rollovers will be subject to annual and lifetime contribution limits.

  • Withdrawal for emergency personal expenses: Plans and traditional IRAs may permit one withdrawal per calendar year up to $1,000 for an unforeseeable or immediate financial need relating to necessary personal or family emergency expenses. This emergency personal expense distribution is exempted from the IRS 10% premature distribution penalty tax. The distribution may be repaid within 3 years and a subsequent distribution cannot be made until the repayment is completed. The plan administrator may rely on a certification by an employee seeking an emergency withdrawal unless the plan administrator has actual knowledge to the contrary.  Effective December 31, 2023.

  • Creation of "Pension Linked Emergency Savings Accounts": Beginning in 2024, employers are allowed to create an Emergency Savings Account (EAS) as part of a defined contribution plan. For non-highly compensated employees, employers may enroll such individuals in an EAS up to 3% of their compensation, but maximum contributions cannot exceed $2,500, which is indexed for inflation. All contributions must be made on an after-tax basis.  Each month, participants may take withdraws from their EAS and the first four withdrawals for a year cannot be subject to distribution fees.

  • Treatment of student loan payments as elective deferrals for purposes of matching contributions: The definition of a matching contribution may include an employer contribution made to a defined contribution plan on behalf of a employee based on their qualified student loan payment amount.  The SECURE Act 2.0 allows an employer to rely on an employee's own annual certification of the amount of their qualifying student loan payments, Effective on plan years after December 31, 2023.

  • Changes to long-term, part-time employees: Minimum eligibility service requirements are reduced from three years (set forth in the SECURE Act in 2019) to two years. Individuals will now be eligible as of the earlier of the following two items:
    • One year of service
    • The completion of a 24-month period consisting of two consecutive 12-month periods with 500 hours of service and attainment of age 21 by the end of the calendar year.
This reduction does not apply to employees subject to collective bargaining or nonresident aliens and the 12-month period beginning before January 1, 2023 is not considered.  Effective on plan years after December 31, 2024.

Next Steps

These as well as other provisions of the SECURE Act 2.0 may have an impact on your planning strategies.  Our team would love to work with you to help clarify how they impact you personally and determine strategies moving forward.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.