Secure 2.0 Act Signed into Law

Posted on January 10th, 2023

The SECURE 2.0 Act of 2022 was included in the recent $1.7 billion spending bill and signed into law December 29, 2022.  The new law builds on the SECURE Act of 2019.  The SECURE Act of 2019 was sweeping legislation that took 10 years to bring to fruition.  The additional changes moved at a much faster pace and combined provisions from several bills that have been introduced over the last few years.

New provisions include increasing the RMD age to 75, mandatory automatic enrollment for new workplace retirement plans such as 401ks, increases to catch-up contributions, and student loan payments can be treated as retirement plan contributions so employees can still receive a company match. Most provisions go into effect after 2023, though some changes start this year.

Required Minimum Distributions (RMDs)

The required minimum distribution age is increasing from 72 to 73 starting this year for those born between 1951 and 1959.  For those born 1960 or later, their first RMD starts at age 75. (Effective date: After 12/31/2022)

If you were born in 1951 and were originally supposed to start RMDs this year, you can now wait until next year to take your first RMD.

Mandates Automatic Enrollment for Startup 401(k) and 403(b) Plans

To help people save for retirement, employees in new plans will be automatically enrolled once they meet eligibility requirements.  The initial automatic enrollment will require 3% of an employee’s salary to be deferred. Employees will have the option to opt out or change the deferral amount.  The deferral amount will increase by 1% annually until it reaches at least 10%. Businesses with less than 10 employees are not required to have this provision. (Effective date: After 12/31/24)

Startup Plan Tax Credit Increasing for Small Businesses

Starting in 2023, employers with less than 50 employees will receive a tax credit for 100% of the startup plan costs paid by the employer.  The tax credit is available for 3 years, and applies to ongoing service fees, such as recordkeeping and other administrative fees, that are paid by the employer. Any type of employer sponsored plan qualifies, including SIMPLE IRAs.  (Effective date: After 12/31/22)

Retirement Plan Catch-Up Contribution Limits Increasing

Starting in 2025, those between ages 60 and 63 will be able to contribute up to $10,000 as a catch-up contribution, a boost from the current catchup amount of $7,500. The catchup amount will be indexed for inflation. (Effective date: After 12/31/24)

Catch-up Contributions Will Receive Roth Tax Treatment

Changes are coming to the tax treatment of catch-up contributions. Starting in 2024 for plan participants over age 50 and earning $145,000 or more per year, their catch-up contributions must go into a Roth account within the plan.  This means taxes will be taken out before it is contributed. Currently, catch-up contributions can be made on a pre-tax or Roth basis depending on provisions in a plan.

One benefit is the designated Roth contributions will grow tax-free. But keep in mind, the Roth account will be subject to the five-year holding rules.  The Roth 401(k) has a separate 5-year clock from any existing Roth IRA accounts a participant has.  However, if the Roth 401k is rolled into an existing Roth IRA, the holding period will be based on when the Roth IRA account was established.

Participants that don’t already have a Roth IRA should consider opening one this year to get their 5-year clock started. (Effective date: After 12/31/23)

Indexing IRA Catch-Up Limits

Catch-up contributions have been limited to $1k per year for those 50 and above since 2001.  Starting in 2024 the catch-up contribution will be indexed based on inflation. (Effective date: After 12/31/23)

Rollover a 529 Plan into a Roth IRA

Starting in 2024, the beneficiary of a 529 college savings plan can roll as much as $35,000 into a Roth IRA over the course of their lifetime. The rollovers are subject to IRA annual contribution limits, however, excludes Roth IRA income limits. The plan must be open for at least 15 years to take advantage of this new perk.

This will help beneficiaries that didn’t use the 529 plan funds for education to jump start their retirement saving.  Furthermore, they won’t be subject to penalties when the funds are rolled to a Roth IRA. (Effective date: After 12/31/23)

Receive an Employer Match on Student Loan Payments

Employers can choose to make a matching contribution on qualified student loan payments. The student loan payments will be treated as an employee elective deferral, and the matching contribution will be contributed to the employee’s workplace retirement plan account.  The student loan debt must be incurred by the employee and excludes Parent PLUS loans.

This new provision will help employees build retirement savings while paying off student loans. Employers will have to elect to amend the plan to allow for this matching contribution.  Many may choose to do so to attract talent. (Effective date: After 12/31/23)

Matching Contributions May Be Designated as Roth

Defined contribution plans such as 401(k)s and 403(b)s are now able to make employee matching contributions on a Roth basis. The effective date is as of the date of the enactment of the act.  We anticipate that Plan Sponsors will need to allow for this provision, and further IRS guidance will be needed on how to implement for tax treatment.

H.R.2617 – Consolidated Appropriations Act, 2023