10 Key Changes from Secure 2.0 - Trust Point
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After many previous efforts and false starts, the Consolidated Appropriations Act of 2023 (the “CAA”), which includes the more widely known, Secure 2.0 Act of 2022 (“Secure 2.0”), was enacted.

Secure 2.0 is a significant and sweeping legislation that addresses a long list of issues concerning tax-advantaged retirement savings, including retirement savings via 401(k) retirement plans and other employer-based retirement plans. Indeed, it is likely the most consequential legislation concerning tax-advantaged retirement savings and employer-based retirement plans since the Employee Retirement Income Security Act of 1974 (“ERISA”).

Given its relatively recent enactment and vast scope, proper understanding and full implementation of Secure 2.0 will require years of further interpretation, guidance, and understanding. But, some meaningful guidance from the IRS and Department of Labor has already been issued.

Plan sponsors must proceed carefully and in good faith to understand and implement any necessary or advantageous changes to their plan documents, process, and administration, while remaining attuned to any further guidance and legal interpretation concerning this substantial legislation. As always, for most plan sponsors, the first step should be communicating with their trusted advisors and retirement plan service provider to discuss and determine any needed actions.

Some of the highlights of Secure 2.0 include:

  1. RMD Age Increases: Secure 2.0 increased the age for Required Minimum Distributions (“RMDs”) from 72 to 73. In 2033, it will increase the age for RMDs again from 73 to 75. This should provide individuals with additional time to grow their retirement savings tax-deferred.
  2. Elimination of RMDs for Roth 401(k)s: Prior to 2024, plan participants were required to take pre-death RMDs from Roth 401 (k) and 403 (b) accounts. Starting this year, Secure 2.0 eliminates this requirement, bringing the rule for Roth 401 (k) and 403 (b) RMDs in line with the current rule for Roth IRA RMDs and allowing for longer tax-advantaged growth.
  3. RMD Penalty Reductions: Secure 2.0 has significantly reduced penalties for RMD errors. Indeed, the penalty for failure to take the correct RMD has been reduced from a 50% to 25% tax on the shortfall and can be further reduced to a 10% tax on the shortfall if the error is found and corrected promptly. This appears to be an effort to not overly penalize errors resulting from good faith efforts to comply with the sometimes-complicated RMD requirements.
  4. De Minimis Financial Incentives: Behavioral finance suggests that small, immediate financial incentives (e.g., gift cards) can sometimes have a positive impact on financial behavior. But, prior to Secure 2.0, employers were prohibited from providing such incentives to employees to gain or improve employee participation in an employer-based retirement plan. Secure 2.0 does away with this prohibition. Employers are now allowed to offer small financial incentives to gain or improve employee participation in an employer-based retirement plan so long as the incentives are not paid for with plan assets. Moreover, recent guidance defines “de minimis” as an incentive not exceeding $250 in value.
  5. “Super-Duper” Catch-up Contributions: Starting in 2025, Secure 2.0 will increase allowed plan catch-up contributions for participants who are from 60 to 63 years old. Such participants will be entitled to make catch-up contributions to their retirement plans of $10,000 or fifty percent more than the standard catch-up amount in 2025, whichever is greater, and the increased amounts will be indexed for inflation after 2025. This change presents a meaningful opportunity for individuals nearing retirement to boost their retirement savings.
  6. Emergency Savings Accounts: Under Secure 2.0, employers may offer their non-highly compensated employees plan-linked emergency savings accounts. These accounts are optional and not required. If an employer offers such an account, it may opt employees in automatically. Contributions are made on an after-tax basis, the contribution rate must be set at three percent or lower, and the total employee contribution is capped at $2,500. These accounts are subject to a variety of rules and require careful consideration before adding them to a plan. But, if implemented, they are designed to be accessible and useful during the employee’s working years.
  7. Access to Retirement Funds in Financial Emergencies: Secure 2.0 provides an exception to the general ten percent tax penalty that applies to early withdrawals from some retirement plans (e.g., 401 (k) plans). Unforeseeable and immediate personal or family financial emergencies entitle a participant to a penalty-free distribution of $1,000 per year. The distribution can be repaid into the plan over the following three years. And further distributions may be limited if a repayment has not been made or contributions exceeding the distribution amount have not been made.
  8. Student Loan Matching: Secure 2.0 may allow employees that are paying student loans – and thus who are not able to contribute sufficiently to their retirement plan, to receive employer matching contributions by virtue of their student loan payments. Employers will be permitted – but not required – to make such matching contributions via a 401 (k), 403 (b), 457 (b), or SIMPLE IRA in connection with “qualified student loan payments.” Such matching is subject to a variety of rules and requires careful consideration before implementation. If implemented, this provision may help individuals managing student loan debt to better save for their retirement.
  9. Unilateral Distribution Increase: Plan sponsors were previously permitted to unilaterally distribute – without participant consent – a participant account balance of under $5,000 after an employee is terminated (or experiences another qualifying event). Secure 2.0 increased the maximum amount from $5,000 to $7,000. This should make plan administration a bit easier and less expensive, particularly in businesses with high employee turnover or low plan deferral rates.
  10. Long-Time Part-Time Employees: Secure 1.0 improved accessibility to employer-based retirement plans for long-time part-time employees. It mandated that plan sponsors must offer plan eligibility after an employee works 1,000 hours in one year or after an employee works at least 500 hours per year for three consecutive years. Starting in 2025, Secure 2.0 will shorten the eligibility timeline for long-time part-time employees to working at least 500 hours per year in two consecutive years.

BONUS. Changes to (Some) Catch-up Contributions: Secure 2.0 requires that catch-up contributions to 401 (k), 403 (b), and governmental retirement plans made by employees who earned more than $145,000 in the prior calendar year, must be made to a Roth account using after-tax dollars. These amounts will be indexed to inflation and thus will almost certainly be adjusted over time. provision will not become mandatory until 2026.

Secure 2.0 is big news and a big deal. It will have a significant and long-lasting effect on tax-advantaged retirement savings and employer-based retirement plans. Indeed, the specific items noted in this article are just the tip of the Secure 2.0 iceberg – the law includes many other significant changes and provisions.

Talk to us! Feel free to contact us if you would like to know more or if you have any questions.

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