Understanding SECURE Act 2.0
Updated: Sep 18
When SECURE Act 2.0 was officially signed at the end of 2022, over 90 changes were issued to help reform the retirement system so Americans could more easily transition into retirement. While reviewing the full bill is an option for plan sponsors and participants wanting to prepare themselves for the road ahead, wading through the sea of information is time consuming and confusing. Instead, RPCSI has highlighted the core provisions currently in effect and what changes will need to be navigated in the coming years.
The SECURE Act 2.0 Roadmap:
Relaxing RMD Guidelines
Required minimum distributions—RMDs—have increased from 72 to 73 and will be raised again to 75 in 2033. Additionally, withdrawment failure penalties have been reduced to 25% of the RMD amount not taken. If the account is an IRA, the penalty will only be 10% granted the account holder promptly submits their tax returns and withdraws the required minimum amount.
Converting Employer Contributions to Roth
The plan may allow participants to request their Employer Contributions as Roth vs. Before tax. The participant will be required to pay the tax on the contributions made by the employer. Additionally, the participant must have completed the number of years required to be 100% vested in the Employer Contribution being made to be eligible to designate it as Roth. Once the account holder takes the Roth contributions as income, contributions and earnings will be subject to normal Roth rules going forward.
Much guidance is needed from the IRS as to how the tax reporting will be handled. Currently, investment providers need to update their systems before they will be able to accept these dollars, so although the bill made this provision eligible upon enactment the ability to properly track and handle the tax reporting is in the hands of the investment providers and the IRS which will dictate the timing when this is truly a viable plan feature.
Automatic Disaster Response
In the event of a federally declared disaster, automatic disaster relief rules apply to distributions and loans for retirement plan accounts if the employer elects to offer this in their plan.
Expanding Startup Tax Credits for Cost-Effective Plan Adoption
To build off the groundwork laid by the original SECURE Act to expand plan tax credit for employee-paid plan costs, Secure Act 2.0 removed percentage limitations for qualified small business employers. Additionally, a new tax credit has been created to reimburse small businesses for a portion of the amount of employer contributions made. For employees earning less than $100,000, this tax credit starts at 100% of employer contributions up to $1,000 and scales down by 25% every five years from plan adoption.
Improved IRA Flexibility
Alongside traditional SIMPLE and SEP IRAs, employers are now permitted to offer Roth SIMPLE and SEP IRAs.
More Changes to Roth Accounts
In addition to the changes made in 2023, Roth accounts will no longer require required minimum distributions be taken from them when held in a qualified retirement plan. This aligns with the current rules for Roth IRA funds.
If the Employer elections to offer this, participants will be able to create an emergency savings account. The annual contribution limit will be $2,500, with the first four withdrawals being free from taxes and penalties each year.
Increase to Cash-Out Limits for Mandatory Distributions
The involuntary cash-out limit for mandatory distributions will increase from $5,000 to $7,000.
Contributions to Aid in Student Debt
In 2024, employees making student loan payments will be able to receive matching employer contributions into their retirement accounts, if the Plan Sponsor elects to offer this feature in their plan.
Safe Harbor Designs Available for First Time Plan Sponsors
Employers without a retirement plan in place will be able to offer a “deferral-only” starter 401(k) plan—or safe harbor 403(b) plan. The limits for these plans are similar to the Individual Retirement Account limits but would be employer sponsored.
2025 and Beyond
Resources for Finding Previous Earned Benefits
The Department of Labor is launching a searchable retirement savings database to help individuals claim lost or forgotten benefits.
Saver’s Tax Credit Transitioning to Government Match
The individual participants saver’s tax credit—typically paid as part of a tax refund—will be changing from a credit paid in cash to a government matched contribution. This contribution must be deposited into a retirement plan account or IRA and its credit rate will transition from a scaled range of 10%-50% to a flat rate of 50%. Plan Sponsors can electrather they want to accept these deposits into their plan or if they would rather the participant establishes an Individual Retirment Account to accept these deposits.
Increased Catch-up Contributions
Individuals between the ages of 60 and 63 will be able to make increased catch-up contributions which will be at a rate of 150% of the regular Roth Limit set by the IRS.
Automatic Enrollment Requirements for 401(k) and 403(b) Plans
Employers who establish a plan on December 29, 2022, or after, will be required to automatically enroll employees into new 401(k) and 403(b) plans. These enrollments must have a beginning salary deferral of 3%-10% and must increase by 1% every year until they have reached 10%-15%. The Employer may elect to set the auto-enrollment rate at 10% to eliminate the annual increases.
Be Prepared for SECURE Act 2.0
Even with a simplified roadmap of some of the changes being made to retirement plans, navigating how to prepare your business' retirement plan for SECURE Act 2.0 can be difficult. RPCSI’s experienced team of retirement industry professionals are ready to help you stay on course for your retirement plan goals with personalized plan consultations.