When it comes to saving for retirement, America faces challenges. That’s why Congress introduced new legislation in 2022 to encourage more people to save and make it easier for them to do so. Known as the Secure 2.0 Act, it changes several IRS rules and retirement plans. This alert explains the key provisions of this comprehensive legislation.
Among the most significant changes under Secure 2.0 is the mandate for new retirement plans to automatically enroll employees at a default deferral rate of at least 3%. This is expected to help boost participation rates, and employees can opt out of the plan.
In addition, the SECURE 2.0 Act summary allows employees whose former employers have retirement savings accounts to move their balances into a new employer’s plan if the new plan offers automatic portability. This feature is designed to make it easier for workers to keep track of their retirement savings across jobs and avoid lost tax benefits. The bill also changes existing rules regarding top-heavy testing and includes a credit to support small businesses with many part-time and long-term workers.
The act aims to improve access and effectiveness of retirement savings tools for Americans who need to save more or have the means to save for retirement. It targets various groups, including part-time workers, military spouses, small business owners, and those with student debt. It also increases access to retirement plans by expanding the tax credits available to start a plan and increasing the penalty for missing required minimum distributions (RMDs). Most companies support many of these provisions but do not believe they will close America’s savings gap without a national retirement savings mandate.
The Secure 2.0 Act includes many provisions to help people save more for retirement. It increases the amount that workers over 50 can contribute to 401(k) plans, 403(b) plans, and SIMPLE IRAs, and it expands the types of accounts eligible for catch-up contributions. It also increases the age at which people must start taking required minimum distributions from IRAs and 401(k) accounts.
The law also changes how 401(k) and IRA withdrawals are taxed. Starting in 2024, you’ll be able to withdraw funds from these accounts without incurring a 10% early withdrawal penalty, and you’ll be able to roll over your IRA funds into a new account without paying taxes on any earnings you make on the money.
Another change is that the annual limit for IRA catch-up contributions will be indexed to inflation beginning in 2024. Finally, the bill allows plan sponsors to allow employees to designate employer matching and non-elective contributions as Roth contributions to their 401(k) plans.
Required Minimum Distributions (RMDs)
As cooperation between Republicans and Democrats in Congress has hit an all-time low, the Secure 2.0 Act stands out as a rare area where both sides found common ground. It makes various improvements, from giving part-time workers better access to retirement plans to increasing the size of catch-up contributions for older people with workplace savings to making it easier to move accounts between employers and between types of accounts.
Another necessary change is the age when required minimum distributions, or RMDs must start from retirement plans and IRA accounts. Under the old rules, the triggering date was age 70 1/2. But the SECURE 1.0 Act and the new law increase that to age 72. It also allows a special exception for participants who are 5% owners, meaning they can delay the RMD until April 1 of the year after they retire instead of the usual starting date.
The new law also reduces the excise tax — or penalty — for missing or not taking an RMD on time. If you correct the error within two years, the rate drops from 50% to 25% and possibly 10%. It’s a substantial change because millions of dollars in retirement savings are estimated to be lost or forgotten yearly. The new law enables the creation of a searchable database at the Department of Labor that should help find these lost assets.
The new law expands eligibility in workplace retirement plans for long-term part-time workers. Previously, the Setting, Every Community Up for Retirement Enhancement Act (SECURE) set three years of service as the minimum required to participate in a 401(k). The SECURE 2.0 Act shortens that requirement to two years of service and applies those rules to Code SS 401(k) and ERISA-covered 403(b) plans.
These changes require that employers take current action to prepare for the impact on participation in their 401(k) and 403(b) plans. Plan sponsors will need to review existing employee records, coordinate with payroll service providers, or work with other consultants to ensure hours are tracked properly and that the tracking will be reflected in eligibility for participation under SECURE 2.0 beginning in 2024.