The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 was passed by Congress on December 23, 2022 and signed by President Biden on December 29, 2022. The SECURE Act 2.0 is an expansion of the original SECURE Act (2019) which contains several provisions aimed at improving retirement savings options for American workers and their families and includes provisions related to expanded tax credits for small employers.
The SECURE Act 2.0 contains over 90 provisions, some broad and sweeping, while others only affect a small group of plans and their participants. Although this is not an exhaustive list, here are some of the highlights we wanted to include.
Required minimum distributions (RMDs)
The first SECURE Act generally raised the age at which participants must begin to take RMDs—and pay taxes on them—from traditional IRAs and other qualified plans, from 70½ to 72. The new SECURE Act 2.0 increases the age to 73, starting January 1, 2023, and boosts it to 75 on January 1, 2033. This change allows participants to delay taking RMDs and paying tax on them.
The SECURE Act 2.0 also relaxes the penalties for failing to take full RMDs, reducing the 50% excise (or penalty) tax to 25%. If the failure is corrected in a “timely” manner, the penalty would drop to 10%.
Beginning January 1, 2025, individuals who are ages 60 to 63 can make catch-up contributions to 401(k) plans and SIMPLE plans up to the greater of $10,000 or 50% more than the regular catch-up amount. The increased amounts are indexed for inflation after 2025. (The 2023 annual dollar limit on catch-up contributions is $7,500 for 401(k)s and $3,500 for SIMPLEs, up from $6,500 and $3,000, respectively, for 2022.)
The SECURE Act 2.0 also changes the taxation of catch-up contributions, though, which could reduce the upfront tax savings for those who max out their annual contributions. Effective for taxable years beginning after December 31, 2023, catch-up contributions will be treated as post-tax Roth contributions. Previously, you could choose whether to make catch-up contributions on a pre- or post-tax basis. An exception is provided for employees whose compensation is $145,000 or less (indexed for inflation).
The SECURE Act 2.0 will require 401(k) and 403(b) plans to automatically enroll participants if the employer is offering 401(k) or 403(b) plans, has more than 10 employees, and has been in existence for at least three years. This automatic enrollment will start at 3% and escalates until 10% but cannot be more than 15%. This provision applies to new plans with initial plan years beginning after December 31, 2024.
Under the first iteration of the SECURE Act in 2019, a part-time employee could only participate in employer plans if they had one year of service of at least 1000 hours or three consecutive years of service of at least 500 hours. The required working hours have been reduced in the SECURE Act 2.0, which now allows part-time employees to enroll if they had one year of service of at least 1000 hours (unchanged) or two consecutive years of service of at least 500 hours.
With the transition to the new rules, service before 2021 is disregarded for vesting purposes.
Unenrolled participant disclosures
Employers will no longer be required to provide certain intermittent ERISA or Internal Revenue Code notices to unenrolled participants who have not elected to participate in a workplace retirement plan. However, the SECURE Act 2.0 requires plan sponsors to provide certain disclosures to unenrolled participants to help encourage greater retirement savings.
The SECURE Act 2.0 would require plan sponsors to provide unenrolled participants with an estimate of the monthly retirement income their current savings would provide in retirement, along with information on the benefits of enrolling in the plan and increasing contributions. The legislation would also require unenrolled participants be provided with additional information and resources to help them make informed decisions about their retirement savings.
Expanded tax credits for small employers
While the original SECURE Act increased tax credits for small employer plans, the SECURE Act 2.0 significantly increases the available tax credits. Small employers could receive a tax credit for:
- Starting a new retirement plan: The SECURE Act 2.0 extends the tax credit for small employer plan start-up costs for an additional five years, through 2025. Eligible small employers who establish a new qualified retirement plan could receive a tax credit equal to the lesser of $500 per year for each of the first three years the plan is in place, or the actual start-up costs incurred by the employer in establishing the plan.
- Contributing to employee accounts: Small employers who make contributions to their employees' retirement accounts could receive a tax credit equal to the lesser of $500 per year for each of the first three years the plan is in place, or the actual contributions made by the employer.
- Automatic enrollment: Small employers who adopt automatic enrollment provisions in their retirement plans could receive a tax credit equal to $500 per year for each year the automatic enrollment provisions are in place.
While certain provisions in the SECURE Act 2.0 are effective immediately, the rollout of the SECURE Act 2.0 takes place over several years. It's important to note that these are just a few examples of the ways the SECURE Act 2.0 may affect your Employee Benefit Plan.
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