The SECURE 2.0 Act: Substantial Changes for Retirement Plans and IRAs

The SECURE 2.0 Act of 2022 (“SECURE 2.0” or the “Act”) was signed into law by President Biden on December 29, 2022.  The Act is a follow-on to the Setting Every Community Up for Retirement Enhancement Act of 2019.  The Act makes substantial changes to both qualified retirement plans and IRAs in operation.  Some of these provisions go into effect in 2023 or are retroactive, so retirement plan sponsors and IRA account holders need to be aware of these changes and their impact on their particular situation.  However, the majority of the changes go into effect in 2024 and later years. Additionally, some of the changes are mandatory for plans to adopt and others may be adopted at the discretion of the plan sponsor.

Changes Affecting All Plans
Required Minimum Distributions (“RMDs”)

Under prior law, RMDs were required to begin at age 72 except for anyone that reached age 70½ prior to December 31, 2019.  Those individuals were required to take RMDs at age 70½.

The Act extends RMDs until after participants attain age 73 effective January 1, 2023, and increases the age to 75 starting in 2033. (At the end of this period, when the RMD age increases from 73 to 75, there appears to be overlapping RMD ages for participants born in 1959. We expect that this will be corrected at some point in a technical amendment.) The Act also exempts Roth accounts in 401(k) and 403(b) plans from the pre-death RMD rules, generally, for taxable years after 2023, eliminating the need to rollover to an IRA to minimize RMDs for Roth accounts. In summary, the timeline for RMD beginning ages is as follows:

Birth Year	Age at Which RMDs Begin
1950 or earlier	72 (70½ for those who turned 70½ prior to 2020)
1951 – 1959	73
1960 or later	75

                          

This provision is effective for distributions made after December 31, 2022, for individuals who attain age 72 after that date.

Reduction of Excise Tax for Failure to Take Required Minimum Distribution

The Act reduces the excise tax for failure to take RMDs from 50% of the shortfall to 25%. And it further reduces the excise tax to 10% if the individual corrects the shortfall during a two-year correction window. 

This provision became effective January 1, 2023.

Amendment to Increase Plan Benefit After the Plan’s Year-End

Current law provides that discretionary plan amendments to an existing plan must generally be adopted by the last day of the plan year in which the amendment is to be effective. This prevents an employer from adding plan provisions that may be beneficial to participants after the end of a plan year. The Act allows discretionary amendments that increase participants’ benefits to be adopted by the due date of the employer’s tax return, including extensions.

This provision is effective for plan years beginning after December 31, 2023.

Penalty-Free Withdrawals for Terminally Ill

The Act provides that terminally ill individuals may withdraw retirement funds without being subject to the 10% early distribution tax penalty provided their physician certifies that they have an illness or condition that is reasonably expected to result in death in 84 months or less.

This provision was effective upon enactment on December 29, 2022.

Tax Credit for Small Employer Retirement Plan Startup Costs

Under prior law, small employers with fewer than 100 employees could be eligible for a three-year start-up credit that is up to 50% of administrative costs, up to a maximum yearly cap of $5,000.  The Act provides for an increase in the credit to 100% of qualified start-up costs for employers with up to 50 employees.

It also provides for an additional credit of up to $1,000 per employee for five years equal to the applicable percentage of eligible employer contributions to an eligible employer plan (not including a defined benefit plan). This credit applies to employers with up to 50 employees and is phased out for employers with between 51 and 100 employees.

This provision is effective for plan years beginning after December 31, 2022.

Changes Affecting All Defined Contribution Plans

Changes to Catch-Up Contributions

Under current law, catch-up contributions for participants aged 50 or older to 401(k) plans, 403(b) plans, and governmental 457(b) plans may be made as either pre-tax or Roth contributions.  The Act requires that such contributions be made as Roth contributions, with an exception for any plan participants whose prior-year compensation did not exceed $145,000, as indexed for inflation.

This provision is effective for taxable years beginning after December 31, 2023.

Higher Catch-Up Limits

Under current law, employees who have attained age 50 are permitted to make catch-up

contributions under a retirement plan in excess of the otherwise applicable limits. The limit on catch-up contributions for defined contribution plans (other than SIMPLE plans) for 2023 is $7,500. For SIMPLE plans for 2023 the limit is $3,500. The Act increases these limits to the greater of $10,000 or 150% of the regular catch-up amount in 2024 (as indexed for inflation) for individuals who have attained ages 60, 61, 62 and 63. The increased amounts are indexed for inflation after 2025. For SIMPLE plans, the limit on catch-up contributions for individuals aged 60, 61, 62 and 63 is increased to the greater of $5,000 or 150% of the regular catch-up amount in 2025, indexed for inflation.

This provision is effective for taxable years beginning after December 31, 2024.

Treatment of Matching or Nonelective Contributions as Roth Contributions

Under current law, employer matching and nonelective contributions are made on a pre-tax basis to participants’ accounts. The Act will allow (but not require) defined contribution plans to provide participants with the option of receiving matching or nonelective contributions on an after-tax Roth basis. Student loan matching contributions (see below) may also be designated as Roth contributions. Matching and nonelective contributions designated as Roth contributions are not excludable from the participant’s income, and must be 100% vested when made. 

This provision is effective for contributions made after December 29, 2022.

Treatment of Student Loan Payments as Elective Deferrals

Under the Act, for employees who are paying down student loans, employers may add a provision to their retirement plan to apply the retirement plan’s matching formula to that repayment amount and deposit the match amount into the employer’s retirement savings plan on behalf of the employee. The match amount must be based on qualified student loan payments, which are generally any indebtedness incurred by the employee solely to pay qualified higher education expenses.

This provision is effective for plan years beginning after December 31, 2023.

Withdrawals for Qualified Federal Disasters

SECURE 2.0 provides permanent rules that allow up to $22,000 to be distributed from a retirement plan per disaster for affected individuals. The distribution is not subject to the 10% early distribution tax penalty.  The distribution’s inclusion in income may be spread over a three-year period.  The distributions amount may be recontributed to a plan or account during the three-year period beginning on the day after the date of the distribution.  The provision increases the maximum loan amount to the lesser of $100,000 or 100% of the participant’s account balance for qualified individuals and also extends the repayment period.

This provision is effective for disasters retroactive to January 26, 2021.

Emergency Fund Withdrawals

Under current law, a 10% tax generally applies to early distributions from tax-qualified plans. The Act provides an exception for certain distributions used for emergency expenses that are unforeseeable or for immediate financial needs relating to personal or family expenses. There is one distribution permitted annually of up to $1,000, and an employee may repay the distribution within three years. No additional emergency distributions will be permissible during the three-year repayment period unless repayment occurs.

This provision is effective for distributions after December 31, 2023.

Emergency Savings Accounts

The Act provides that employers may automatically enroll non-highly compensated participants (those earning less than $150,000 in 2023) in an after-tax Roth Emergency Savings Account for up to 3% of compensation, up to a total of $2,500 annually. Participants must be permitted to take tax-free and penalty-free distributions at least once per calendar month.

This provision is effective for plan years commencing after December 31, 2023.

Penalty-Free Withdrawals for Victims of Domestic Abuse

The Act allows a qualified plan to permit participants that self-certify that they have experienced domestic abuse to withdraw the lesser of $10,000, indexed for inflation, or 50% of the participant’s account balance. This type of withdrawal will not be subject to the early distribution 10% tax. Additionally, a participant may repay the withdrawn money over three years and will receive a refund for income taxes on the amounts that are repaid.

This provision is effective for distributions made after December 31, 2023.

Distributions for the Purchase of Long-Term Care Insurance

The Act provides that retirement plans may provide for the distribution of a certain amount per year for certain long-term care insurance contracts. The amount permitted to be distributed is the lesser of: 1) the amount paid by or assessed to the employee during the year for long-term care insurance; 2) 10% of the employee’s vested accrued benefit in the plan; or 3) $2,500 (amount to be indexed for inflation beginning in 2025). The distributions will be exempt from the 10% penalty on early distributions if used to pay premiums for high quality, long-term care insurance. 

This provision is effective for distributions beginning three years after the date of enactment.

Saver’s Credit

Under prior law, the existing Saver’s Credit employs a tiered percentage system ranging from 10-50% based on adjusted gross income (“AGI”) to determine the amount of the credit.  Under Secure 2.0, the Saver’s Credit provides for Treasury to make a direct matching contribution of 50% of the participant’s retirement plan contribution up to $2,000, meaning a maximum amount of $1,000 that will (in theory) be deposited directly by Treasury to the participant’s retirement account as a pre-tax contribution.  To qualify for the match, participants must be 18 years or older and may make up to $41,000 to receive the maximum match.  The maximum is then phased out for compensation between $41,000 and $71,000.

This provision is effective for plan years beginning after December 31, 2026.

Increased Force-Out Rollover Limit

Under current law, employers may transfer a former employees’ retirement account from the employer’s retirement plan into an IRA if their account balance is between $1,000 and $5,000. This provision of the Act increases the upper limit from $5,000 to $7,000.

This provision is effective for distributions occurring after December 31, 2023.

Changes Affecting 401(k) Plans

Automatic Enrollment Features

Newly established 401(k) plans previously had the option of providing for automatic enrollment of newly eligible employees.  Under SECURE 2.0, new 401(k) plans are required to provide an automatic enrollment and escalation arrangement.   The new rules require 401(k) plans to automatically enroll participants upon becoming eligible (employees have the ability to opt out of coverage). The initial automatic enrollment amount must be at least 3% but not more than 10%. Employers must also automatically increase employee salary deferral contributions each year by 1% until they reach at least 10%, but may not increase them to more than 15%.

Existing 401(k) plans that do not currently provide for automatic enrollment are considered “grandfathered” plans and are not required to implement the new rules, and employers with less than ten employees are also exempt.

This change is effective for plan years beginning after December 31, 2024.

Starter 401(k) Plans

The Act creates two new plan designs, one for 401(k) plans and one for 403(b) plans, for employers that do not currently sponsor a retirement plan. The “starter 401(k) deferral-only arrangement” would generally require that all employees be enrolled in the plan with a deferral rate of 3% to 15% of compensation. The limit on annual deferrals would be the same as the IRA contribution limit. The limit on annual deferrals will be the same as the IRA contribution limit  ($6,500 in 2023, with an additional $1,000 catch-up beginning at age 50), with both limits indexed for inflation.

This provision is effective for plan years beginning after December 31, 2023.

Long-Term, Part-Time Employees

Under current law, 401(k) plans (except for those covering union employees) are required to have dual-eligibility provisions under which an employee will be required to complete either 1) one year of service and 1,000 hours or 2) three years of service in which the employee has worked at least 500 hours.  In order to mitigate the potential problems in passing annual nondiscrimination testing, the plan sponsor may elect to exclude those participants meeting the second requirement from the testing. Service for plan year prior to 2021 is disregarded for this purpose.  The Act shortens the service period to two years instead of three years for the second requirement above and individuals must be eligible to participate, for plan years commencing in 2025. Pre-2023 service is disregarded for eligibility and vesting purposes under this new, SECURE 2.0 part-time employee provision.

This provision is effective for plan years beginning after December 31, 2024.

Solo 401(k) Plans – Retroactive Initial Plan Year Salary Deferrals

Under the Act, for a sole proprietor’s initial plan year of a 401(k) plan (if the owner is the only employee), the elective deferrals may be made to the 401(k) plan by the tax filing due date (determined without regard to any extension).  This provision allows for larger first-year contributions to a plan in the case that the sole proprietor’s eligible income is less than the regulatory maximum for qualified retirement plans ($330,000 in 2023).

This provision is effective for plan years beginning after December 31, 2022.

Changes Affecting 403(b) Plans

Automatic Enrollment Features

Newly established 403(b) plans previously had the option of providing for automatic enrollment of newly eligible employees.  Under SECURE 2.0, new 403(b) plans are required to provide an automatic enrollment and escalation arrangement.   The new rules require 403(b) plans to automatically enroll participants upon becoming eligible (employees have the ability to affirmatively opt out of coverage). The initial automatic enrollment amount must be at least 3%, but not more than 10%. Employers must also automatically increase employee salary deferral contributions each year by 1% until they reach at least 10%, but may not increase them to more than 15%.

Existing 403(b) plans that do not currently provide for automatic enrollment are considered “grandfathered” plans and are not required to implement the new rules and employers with less than ten employees are also exempt.

This change is effective for plan years beginning after December 31, 2024.

Safe Harbor 403(b) Plans

The Act creates two new plan designs, one for 401(k) plans and one for 403(b) plans, for employers that do not currently sponsor a retirement plan. The “safe harbor 403(b) plan” would generally require that all employees be enrolled in the plan with a deferral rate of 3% to 15% of compensation. The limit on annual deferrals would be the same as the IRA contribution limit ($6,500 in 2023, with an additional $1,000 catch-up beginning at age 50), with both limits indexed for inflation.

This provision is effective for plan years beginning after December 31, 2023.

Long-Term, Part-Time Employees

The Act extends the long-term, part-time employee provisions to 403(b) plans and requires them to have dual-eligibility provisions under which an employee will be required to complete either 1) one year of service and 1,000 hours or 2) two years of service in which the employee has worked at least 500 hours.  In order to mitigate the potential problems in passing annual nondiscrimination testing, the plan sponsor may elect to exclude those participants meeting the second requirement from the testing. Pre-2023 service is disregarded for eligibility and vesting purposes.

This provision is effective for plan years beginning after December 31, 2024.

Hardship Withdrawal Rule Changes

The Act brings the hardship distribution rules for 403(b) plans in line with those of 401(k) plans. Accordingly, a 403(b) plan may distribute qualified nonelective contributions, qualified matching contributions, and earnings on any of these contributions (including elective deferrals) in making a hardship distribution. The law also provides that distributions from a 403(b) plan are not treated as failing to be made upon hardship solely because the employee does not first take any available loans.

The provision is effective for plan years beginning after December 31, 2023.

Changes Affecting SIMPLE Plans

SIMPLE 401(k) and SIMPLE IRA Contribution Limit

Under current law, the annual contribution limit for employee elective deferral contributions to a Simple IRA plan is $15,500 for 2023 and the catch-up contribution limit beginning at age 50 is $3,500 for 2023.  The Act increases the annual deferral limit to 110% of the 2024 Simple IRA plan limit, as indexed, and the catch-up contribution limit at age 50 to 110% of the 2024 Simple IRA plan limit, as indexed, in the case of an employer with no more than 25 employees. An employer with 26 to 100 employees would be permitted to provide these higher deferral limits, but only if the employer either provides a 4% matching contribution or a 3% employer contribution. The Act makes similar changes to the contribution limits for SIMPLE 401(k) plans.

This provision is effective for tax years after December 31, 2023.

Additional Non-Elective Contributions

Current law requires employers with SIMPLE plans to make employer contributions to participants of either 2% of compensation or 3% of employee elective deferral contributions. SECURE 2.0 permits an employer to make additional contributions to each participant of the plan in a uniform manner, provided that the contribution does not exceed the lesser of 10% of compensation or $5,000 (to be indexed for inflation).

This provision is effective for tax years beginning after December 31, 2023.

Changes Affecting Defined Benefit Plans

Cash Balance Calculations

Under existing law, cash balance plans are subject to numerous technical rules that make it difficult to offer market-based plan designs.  The Act permits a cash balance plan with variable interest crediting rates to use a projected interested crediting rate that is reasonable, but not in excess of 6%.

The provision is effective for plan years beginning after the date of enactment.

Changes Affecting IRAs

Indexing of IRA Catch-Up Limit

The annual IRA catch-up contributions for those who are age 50 or over are a flat $1,000 and are currently not indexed for inflation. Under the Act, catch-up contributions will be indexed for inflation in $100 increments in the same manner as the indexing for the regular annual contributions.

This provision is effective for tax years beginning after December 31, 2023.

Increase in the Age for Required Distributions

Under prior law, RMDs were required to begin at age 72 except for anyone that reached age 70 ½ prior to December 31, 2019.  Those individuals were required to take RMDs starting at age 70 ½. The Act extends RMDs until after participants attain age 73 effective on January 1, 2023, and increases the age to 75 starting in 2033. (At the end of this period, when the RMD age increases from 73 to 75, there appears to be overlapping RMD ages for participants born in 1959. We expect that this will be corrected at some point in a technical amendment.)

In summary, the timeline for RMD beginning ages is as follows:

Birth Year	Age at Which RMDs Begin
1950 or earlier	72 (70½ for those who turned 70½ prior to 2020)
1951 – 1959	73
1960 or later	75

      

Effective for distributions made after December 31, 2022, for individuals who attain age 72 after that date.

SEP and SIMPLE Roth IRAs

Under the Act, SEP IRAs and a SIMPLE IRAs are now permitted to be designated as Roth IRAs. 

This provision is effective taxable years beginning after December 31, 2022.

Saver’s Credit

Under prior law, the existing Saver’s Credit employs a tiered percentage system ranging from 10-50% based on adjusted gross income (“AGI”) to determine the amount of the credit.  Under Secure 2.0, the Saver’s Credit provides for Treasury to make a direct matching contribution of 50% of their IRA contribution up to $2,000, meaning a maximum amount of $1,000 that will (in theory) be deposited directly by Treasury to the individual’s IRA account as a pre-tax contribution.  To qualify for the match, the IRA beneficiary must be 18 years or older and may make up to $41,000 to receive the maximum match.  The maximum match is then phased out  for compensation between $41,000 and $71,000.

This provision is effective for plan years beginning after December 31, 2026.

Withdrawals for Qualified Federal Disasters

The act provides permanent rules go into effect that allow up to $22,000 to be distributed from an IRA per disaster for affected individuals and are not subject to the 10% early

distribution tax penalty.  The distribution’s inclusion in income may be spread over a three-year period.  The distributions amount may be recontributed to an account during the three-year period beginning on the day after the date of the distribution. 

This provision is effective for disasters retroactive to January 26, 2021.

Distributions for the Purchase of Long-Term Care Insurance

The Act provides that IRAs may provide for the distribution of a certain amount per year for certain long-term care insurance contracts. The amount permitted to be distributed is the lesser of: 1) the amount paid by or assessed to the employee during the year for long-term care insurance; 2) 10% of the employee’s vested accrued benefit in the plan; or 3) $2,500 (amount to be indexed for inflation beginning in 2025). The distributions will be exempt from the 10% penalty on early distributions if used to pay premiums for high quality, long-term care insurance. 

This provision is effective for distributions beginning three years after the date of enactment.

Conclusion

The SECURE 2.0 Act makes substantial changes to both retirement plans and IRAs that affect both the operation of the plans and the planning that has been done around the assets held in the accounts.  Both plan sponsors and participants/account holders will want to understand these changes and modify their plans and related planning accordingly