SECURE Act 2.0

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• The age to start taking Required Minimum Distribution (RMD)s increased to age 73 in 2023 and will increase to 75 by 2033.
• The penalty for failing to take an RMD decreased to 25% of the RMD amount, from 50% currently, and 10% if corrected in a timely manner for IRAs.
• Starting in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans.
• Catch-up contributions will increase in 2025 for 401(k), 403(b), governmental plans, and IRA account holders.
• Defined contribution retirement plans will be able to add an emergency savings account associated with a Roth account.

The Act contains 92 new provisions to promote savings, boost incentives for businesses, and offer more flexibility to those saving for retirement. Though we include some important information, we will not go over each of the 92 individual provisions

Many of the provisions for employers are optional if a retirement plan is offered already. As is the case though, as more of these provisions are around longer, they may become more usual than unusual as time goes on. 

Student loan debt. Starting in 2024, employers will be able to "match" employee student loan payments with matching payments to a retirement account, giving workers an extra incentive to save while paying off educational loans. 

The goals is to provide employees an option to still save for retirement without sacrificing paying down student loan debt. In essence, if an employee is making payments towards student loan debt, the employer match could go into the retirement plan even though the employee is not contributing.  

Matching for Roth accounts. Employers will be able to provide employees the option of receiving vested matching contributions to Roth accounts (this may take time as Recordkeepers and payroll vendors need to update software to allow). Previously, matching in employer-sponsored plans was made on a pre-tax basis. Contributions to a Roth retirement plan are made after-tax, after which earnings can grow tax-free.

Important to know: Unlike Roth IRAs, RMDs from an employer-sponsored plan are required for Roth accounts until tax year 2024. 

Long-term, part-time employee eligibility. Long-term, part-time employees will now become eligible sooner under the SECURE 2.0 Act, enabling them to begin saving for their future earlier and putting them in a better position to achieve their retirement goals. The original SECURE Act required that long-term, part-employees (those who worked between 500 and 999 hours for three consecutive years) be eligible to participate in their company's retirement plan. Under the new law, that requirement will be reduced to two years starting in 2025.

  Automatic enrollment requirement. Most companies will now be required to automatically enroll eligible employees into their retirement plan, helping more Americans reach retirement readiness. Employers who start new retirement plans will be required to automatically enroll employees at a rate of at least 3% but not more than 10%, beginning in 2025. New companies in business for less than three years and businesses with 10 or fewer workers are excluded from this requirement.

Emergency savings. Defined contribution retirement plans would be able to add an emergency savings account that is a designated Roth account eligible to accept participant contributions for non-highly compensated employees starting in 2024. Contributions would be limited to $2,500 annually (or lower, as set by the employer) and the first 4 withdrawals in a year would be tax- and penalty-free. Depending on plan rules, contributions may be eligible for an employer match. In addition to giving participants penalty-free access to funds, an emergency savings fund could encourage plan participants to save for short-term and unexpected expenses. 

Cash Out Limits. Increase in cash out limit for mandatory distributions When an individual leaves employment, if their defined contribution plan balance is under a certain limit, the plan sponsor can force that distribution out of the plan. Individuals are given the option to receive that force-out amount or direct it to be rolled to an IRA or another employer plan. If no action is taken, the plan sponsor will send it to an IRA established on behalf of the former employee. The legislation increases the current cash out limit from $5,000 to $7,000.

  Catch-up contributions after age 50 must be after-tax Roth contributions Prior to SECURE 2.0, employees aged 50 and older who made catch-up contributions were permitted to designate that this additional contribution be made either on a tax deferred basis or to a Roth account on a post-tax basis. SECURE 2.0 now requires that all catch-up contributions be made on an after-tax basis to a Roth retirement account beginning in 2026. As a result, the catch-up contribution will not be excluded from the employee’s income but will grow tax-free and can be withdrawn tax-free in the future, subject to Roth distribution rules. There is an exception for employees with compensation of $145,000 or less, adjusted annually for inflation. The $145,000 limit is based on the prior year’s wages paid by the employer sponsoring the plan. Plans that do not currently permit Roth contributions will need to consider adding a Roth contribution option if they are to continue to permit catch-up contributions.