SECURE Act 2.0 is Now Law: What You Need to Know for Your Employee Retirement Plans

Happy New Year, Employers! Late last week, President Biden signed into law the $1.7 trillion omnibus spending package, the 2023 Consolidated Appropriations Act (“CAA”). Included in the CAA is the much-anticipated SECURE Act 2.0, which contains numerous retirement reform provisions significantly impacting employer-sponsored retirement plans.

SECURE Act 2.0 expands reforms enacted in the 2020 SECURE Act making several changes to retirement plan design intended to modernize the current employer-sponsored retirement system; encourage workers to increase their retirement savings; improve access to employer-sponsored retirement plans; and lessen administration requirements. Most plans will be impacted by SECURE Act 2.0’s provisions. While several of the changes below do not require plans to be amended until 2025, some provisions take effect immediately.

KEY PROVISIONS OF THE SECURE ACT 2.0 FOR EMPLOYER-SPONSORED RETIREMENT PLANS

Employer Match for Student Loan Payments

• Student loan payments may be treated as elective deferrals for matching contribution purposes for 401(k), 403(b), SIMPLE IRA, and Governmental 457(b) plans. Qualified student loan payments are broadly defined employee indebtedness incurred solely to pay qualified higher education expenses of the employee. Plans may test employees receiving matching contributions on student loan repayments separately for elective deferral non-discrimination testing. Effective for plan years beginning after December 31, 2023.

Required Minimum Distributions (“RMDs”)

• Increases to age 73 for individuals who attain age 72 after December 31, 2022, and age 73 before January 1, 2033. Increases to age 75 in 2033 for individual who attain age 74 after December 31, 2032.
• Roth accounts will be exempt from the RMD rules. Effective taxable years beginning after December 31, 2023.
• Excise tax for failing to take an RMD decreases from 50% to 25% or 10% if corrected within two years. Effective for taxable years beginning after December 29, 2022.
• Spouse beneficiaries may elect to be treated as the deceased employee for RMD purposes. Effective calendar years beginning after December 31, 2023.

Catch-Up Contribution Provisions

• Catch-up contributions for non-SIMPLE plan participants between the ages of 60 and 63 increase to the greater of $10,000 or 150% of the regular catch-up amount.
• All non-SIMPLE plan catch-up contributions must be Roth contributions for participants with compensation equal to or in excess of $145,000.
• For SIMPLE plan participants between the ages of 60 and 64, catch-up contributions increase from $3,000 to the greater of $5,000 or 150% of the regular catch-up amount.
• Catch-up contribution provisions are effective tax years beginning after December 31, 2024. Increased amounts will be indexed for inflation after 2025.

Roth Contributions

• For participants with compensation exceeding $145,000 (indexed), all catch-up contributions to qualified retirement plans must be subject to Roth tax treatment. Effective taxable years beginning after December 31, 2023.
• Allows defined contribution plans to provide the option to participants of receiving matching contributions on a Roth basis. Effective December 29, 2022.
• Roth accounts will be exempt from the RMD rules. Effective taxable years beginning after December 31, 2023.
• Allows SIMPLE IRAs to accept Roth contributions. Effective taxable years beginning after December 31, 2022
• Allows employers to offer employees the ability to treat simplified employee pension plan (“SE”) employee and employer contributions as Roth, in whole or in part. Effective taxable years beginning after December 31, 2022.

Lower 401(k) Eligibility Requirements for Part-Time Workers

• Employees will be able to participate in their employer’s 401(k) plan if the employee worked at least 500 hours per year for at least two years (reduced from the previous 3-year rule). Effective for plan years beginning after December 31, 2024.

Mandatory Automatic Enrollment in New 401(k) and 403(b) Plans

• New 401(k) and 403(b) plans are required to automatically enroll participants upon becoming eligible (employees may opt out of coverage) with an automatic default employee contribution rate of at least 3% and up to 10%, increasing annually by 1% until a maximum of at least 10%. Small businesses with 10 or fewer employees, businesses new within the last three years, church and governmental plans are exempt from this provision and all current 401(k) and 403(b) plans are grandfathered. The provision is effective for plan years beginning after December 31, 2024.

Retirement Plan Emergency Withdrawals

• Excepted from the 10% tax penalty for early withdrawals will be distributions used for or immediate financial needs relating to personal or family emergency expenses. Only one distribution is permissible per year of up to $1,000, and taxpayers have the option to repay distributions within three years. Additional emergency distributions are not permissible during the repayment period unless repayment occurs. Effective for distributions made after December 31, 2023.

Retirement Plan Emergency Savings Accounts

• Employers may offer non-highly compensated employees pension-linked emergency savings accounts by automatically opting employees into such accounts at not more than 3% of compensation, capped at $2,500 (or lower as determined by the employer). Additional contributions after cap may be directed into the employee’s Roth defined contribution plan. Contributions are Roth-based and treated as elective deferrals for purposes of matching contributions with an annual matching cap set at $2,500 or lower as determined by the employer. Employees may accept emergency savings accounts as cash or roll them into a Roth defined contribution plan or IRA upon separation from service. Effective plan years beginning after December 31, 2023.

Self-Certification that Hardship Distribution Conditions Are Met

• Allows plan administrators to rely on a participant’s self-certification in certain situations that an event constituting a hardship for purposes of taking a hardship withdrawal has occurred. Effective plan years beginning after December 29, 2022.

Employers May Now Offer Employees Small Immediate Incentives for Contributing to Plans

• Employers may now offer de minimis financial incentives such as low-dollar gift cards to boost participation in retirement plans. Effective plan years beginning after December 29, 2022.

Plan Amendments Increasing Benefit Accruals Allowed Until Employer Tax Return Due Date

• Allows discretionary amendments that increase participants’ benefits to be adopted by the due date of the employer’s tax return. Effective plan years beginning after December 31, 2023.

Penalty-Free Retirement Plan Withdrawal for Individual Case of Domestic Abuse

• Allows retirement plans to allow participants self-certifying they have experienced domestic abuse to withdraw the lesser of $10,000 (indexed) or 50% of the participant’s account that is not subject to the 10% tax on early distributions. Participants can repay the withdrawn amounts over 3 years and will be refunded for income taxes on amounts repaid. Effective for distributions made after December 31, 2023.

Penalty-Free Retirement Plan Early Distribution Due to Terminal Illness

• Effective for distributions made after December 29, 2022.

Use of Retirement Funds in Connection with Qualified Federally Declared Disasters

• Allows up to $22,000 in distributions from employer retirement plans or IRAs for affected individuals. Distribution amounts are not subject to the 10% additional tax and are taken into account as gross income over 3 years. Distributions may be repaid to a tax-preferred retirement account and amounts distributed prior to the disaster to purchase a home can be recontributed. Employers are permitted to provide for a larger amount to be borrowed from a plan by affected individuals and for additional time for repayment of plan loans owed by affected individuals. Effective for disasters occurring on or after January 26, 2021.

Recognition of Tribal Government Domestic Relations Orders

• Adds Tribal courts to the those authorized under federal law to issue qualified domestic relations orders (QDROs). Effective to domestic relations orders received by plan administrators after December 31, 2022, including any such order which is submitted for reconsideration after such date.

Recovery of Retirement Plan Overpayments to Retirees

• Retirement plan fiduciaries are now allowed to not recoup overpayments mistakenly made to retirees. If recoupment is made, certain limitations and protections are applied. Plan fiduciaries may proceed with respect to determinations made prior to the date of enactment (December 29, 2022) to seek or not seek recovery of overpayments.

Increased Ceiling for Mandatory Lump Sum Distributions from $5,000 to $7,000

• Effective for distributions made January 1, 2024, and later.

Application of Top-Heavy Rules to Defined Contribution Plans Covering Excludable Employees

• Top-heavy plans that cover otherwise excludable employees, i.e., employees who do not satisfy minimum age and service eligibility rules of age 21 and one year of service, are allowed to perform separate top-heavy testing for excludable and non-excludable employees. Effective for plan years beginning after December 31, 2023.

403(b) Specific Changes

• 403(b) plans allowed to invest in collective investment trusts, effective after December 29, 2022.
• Current 401(k) hardship distribution rules now applicable to 403(b) plan. Effective plan years beginning after December 31, 2023.
• 403(b) plans may now join a multiple employer plan (MEP) or pooled employer plan (PEP), effective plan years beginning after December 31, 2022.

SIMPLE Plans

• Employers may make additional contributions to SIMPLE plan participants up to the lesser of 10% of compensation or $5,000 (indexed). Effective taxable years beginning after December 31, 2023.
• Increases annual deferral limits and catch-up contributions at age 50 by 10% for employers with no more than 25 employees. Employers with 26 to 100 employees are permitted to provide higher deferral limits if the employer also provides a 4% match or 3% employer contribution. Effective for taxable years beginning after December 31, 2023.
• Allows employers to replace a SIMPLE IRA plan with a safe harbor or SIMPLE 401(k) plan at any time during the year. Effective plan years beginning after December 31, 2023.

Small Employer Pension Plan Startup Costs Credit Modification

• Employers with less than 50 employees are now eligible for an increase of the three-year start-up credit up to 100% of administrative costs and additional credit for 5 years of up to $1,000 per employee equal to the applicable percentage of eligible employer contributions to an eligible employer defined contribution plan, with an exception for employees with wages in excess of $100,000 (indexed). Effective tax years beginning after December 31, 2022.

Small Employer Startup Tax Credit Expanded for Joining a Multiple Employer Plan

• Employers with fewer than 100 employees joining a MEP eligible are now eligible for the start-up credit for all three years, regardless of how long the MEP has been in existence. Effective retroactively for taxable years beginning after December 31, 2019.

Small Employers Military Spouse Retirement Plan Eligibility Credit

• Provides for a nonrefundable income tax credit for eligible small employers employing military spouses participating in the employer’s defined contribution plan if: military spouses become immediately eligible for plan participation within two months of hire; upon plan eligibility, the military spouse becomes eligible for any matching or nonelective contribution that would have otherwise been eligible for at 2 years of service; and the military spouse becomes 100% vested immediately in all employer contributions. The tax credit is $200 per participating non-highly compensated military spouse plus 100% of employer contributions up to an additional $300 per employee for up to three years. Effective for taxable years beginning after December 29, 2022.

Elimination of the “First Day of the Month” Requirement for Governmental 457(b) Plans

• Allows participants in governmental 457(b) plans to change their deferral rate at any time before the compensation is available to the individual, conforming to the rule already in place for 401(k) and 403(b) plans. Effective taxable years beginning after December 29, 2022.

Elimination of Compensation-Based Limit for Non-Highly Compensated Employees in Eligible Rural Electric Cooperative Plans

• Effective limitation years ending after December 29, 2022.

Exemption from Early Withdrawal Penalty for Certain Governmental Plan Participants

• Extends an exemption from the 10% early withdrawal penalty to public safety officers and corrections officers who are employees of state and local governments with at least 25 years of service with the employer sponsoring the plan. Effective for distributions made after December 29, 2022.

Retroactive First-Year Elective Deferrals Allowed for Sole Proprietors or Single-Member LLC Newly Sponsored 401(k) Plans

• Allows new plans sponsored by sole proprietors or single-member LLCs to receive employee contributions up to the date of the employee’s tax return filing date for the initial year. Effective for plan years beginning after December 29, 2022.

Employers with No Retirement Plan May Open New “Starter 401(k) Plans”

• Allows an employer that does not already sponsor a retirement plan to offer a starter 401(k) plan or a safe harbor 403(b) plan. These newly created plans would generally require default enrollment of all employees at a 3% to 15% percent of compensation deferral rate. Annual deferrals would be the same as the IRA contribution limit, which for 2022 is $6,000 with an additional $1,000 in catch-up contributions beginning at age 50. Effective for plan years beginning after December 31, 2023.

Again, if you would like more information on how the SECURE Act 2.0 will impact your employer-sponsored retirement plan, or if you have questions relating to your company’s employee benefit or executive compensation plans, please contact Fraser Stryker Employee Benefits team.