Terri Roughton, QKA, CEBS | Pension Specialist
The “SECURE 2.0” legislation that was signed into law in late 2022 makes significant changes to workplace retirement plans, and many plan sponsors will have to amend their plan documents in order to take advantage of the law’s benefits. However, the Department of Labor (DOL) and the Internal Revenue Service (IRS) have been slow in issuing guidance on the law’s many provisions.
Some guidance will be issued in the coming months, but we urge plan sponsors not to wait until December to make certain changes in their plans – especially adding Roth features. The new law requires that catch-up contributions for higher-earning workers making FICA wages in excess of $145,000 in the prior year be made as Roth contributions. Adding a Roth feature to a plan is easy, but waiting till the last minute can complicate things. It’s important to note that these catch-up contributions will not be subject to tax deferral, as normal 401(k) contributions are, since all Roth contributions are after-tax contributions. There are still many questions regarding this provision for which the DOL and IRS have not yet provided guidance.
UPDATE: The IRS recently issued Notice 2023-62 establishing an “administrative transition period” extending to January 1, 2026, during which time catch-up contributions will be treated as satisfying the requirements of SECURE 2.0 even if the contributions are not designated as Roth contributions.
Plan sponsors who know they want to make changes in their plans should be talking to advisors now about what amendments they may have to make before next January to align their plans with SECURE 2.0 provisions.
Key Provisions of SECURE 2.0
SECURE 2.0 – a sequel to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 – further expands access and seeks to boost participation in retirement saving plans among all employers. The Act features dozens of provisions that will take effect over the next decade.
This is a large legislative package that will impact plan sponsors and participants alike. Following are some of the key provisions of SECURE 2.0 that 401(k) plan sponsors should be aware of:
- Reduction in excise taxes on certain accumulations – The legislation reduces the penalty for failure to take required minimum distributions (RMDs) from 50% to 25%, with a further reduction to 10% if the RMD failure is corrected in a timely manner.
Effective on December 29, 2022.
- Employees may self-certify that hardship criteria are met – Allows employees to self-certify that they have had an event that constitutes a hardship or unforeseeable emergency for purposes of taking a hardship or emergency withdrawal.
Effective for plan years beginning after December 29, 2022.
- Optional treatment of employer matching or nonelective contributions as Roth contributions – Allows plans to provide participants with the option of receiving matching and qualified nonelective contributions on a Roth basis.
Effective for contributions made to plans after December 29, 2022.
- Increase in age at which RMDs start – Starting on January 1, 2023, SECURE 2.0 increased to 73 the age at which required minimum distributions (RMDs) begin. The RMD age will advance to 75 starting on January 1, 2033.
- Starter 401(k) plans for employers with no previous plan – The legislation allows an employer who does not sponsor a retirement plan to offer a “starter” 401(k) with simplified requirements and lower contribution limits.
Effective for plan years beginning after December 31, 2023.
- Eligibility for long-term, part-time employees – The original SECURE Act required long-term, part-time employees, defined as employees who have worked 500 or more hours in each of the three consecutive years prior to January 1, 2024, to be able to participate in the deferral-only portion of a 401(k) plan. SECURE 2.0 reduces the three consecutive years requirement to two consecutive years.
Effective for plan years beginning after December 31, 2024.
- Higher catch-up limit for certain participants over age 60 –SECURE 2.0 increases catch-up contribution limits for ages 60 to 63 to the greater of $10,000 ($5,000 for SIMPLE plans) or 50% more than the regular catch-up amount. The increased amounts will be indexed for inflation after 2025.
Effective for taxable years beginning after December 31, 2024.
- Auto-Enrollment and auto-escalation: Under SECURE 2.0, newly created 401(k) and 403(b) plans must include automatic enrollment and escalation features. Employees must affirmatively opt out of the plan if they don’t want to contribute. If they don’t opt out and don’t select a specific contribution level, the sponsor must enroll them and start contributions at a rate between 3% and 10%, which escalates 1% per year until they fall within a range of 10% to 15%. Organizations with fewer than 10 employees, as well as church and government plans, are exempt.
Effective starting January 1, 2025.
Plan amendments designed to bring retirement plans into alignment with the provisions of SECURE 2.0 must be made by December 31, 2025 (or 2027 in the case of government plans).
If you would like to have a discussion about adding features to your plan or complying with regulatory provisions of SECURE 2.0, contact your Frost PLLC advisor.