What Is the SECURE Act 2.0? Everything You Need to Know
Part of a series | SECURE 2.0 Act Insights
These provisions offer many new benefits to employers and employees that are designed to make it more attractive for employers to offer retirement plans and improve retirement outcomes for employees.
On Dec. 29, 2022, the Consolidated Appropriations Act of 2023 (HR 2617) was signed into law. The Act includes important provisions affecting retirement savings plans that are intended to build upon the 2019 SECURE Act. These provisions, collectively referred to as the SECURE Act 2.0, offer many new benefits to employers and employees that are designed to make it more attractive for employers to offer retirement plans and improve retirement outcomes for employees.
How does the SECURE Act 2.0 impact retirement plans?
Below is a summary of selected provisions of the SECURE Act 2.0 with potentially broad effects. However, the Act includes some 90 provisions affecting retirement savings plans. Employers will need to consult with appropriate legal counsel and other professionals to assess what changes may be relevant to their circumstances.
Many employees must be automatically enrolled
Beginning in 2025, employers who start new retirement plans after December 29, 2022, will be required to automatically enroll employees in their retirement plan at a rate of at least three percent but not more than 10 percent of eligible wages. Employees may opt-out. New companies (in business for less than three years) and employers with 10 or fewer workers are excluded from this requirement.
An automatic enrollment plan must allow employees to withdraw automatic contributions and any earnings within no more than 90 days of the first contribution without being subject to the 10 percent penalty on early withdrawals.
IRS Notice 2024-02 clarified that the automatic enrollment mandate applies to starter 401(k) plans and safe harbor 403(b) plans in addition to normal 401(k)s.
Retirement plans must automatically escalate
For new retirement plans started after December 29, 2022, contribution percentages must automatically increase by one percent on the first day of each plan year following the completion of a year of service until the contribution is at least 10 percent but no more than 15 percent of eligible wages.
This automatic escalation requirement goes into effect for plan years beginning after Dec. 31, 2024.
Exceptions apply for governmental and church plans, businesses with 10 or fewer employees and employers that have been in business for less than three years.
Changes to catch-up contributions
In 2024, participants ages 50 and older can contribute an extra $7,500 per year to their 401(k) account. For participants ages 60 to 63, this amount will increase to $10,000 per year (indexed for inflation) starting in 2025.
Starting in 2026, all catch-up contributions for participants earning over $145,000 in the prior calendar year must be made on a Roth (after-tax) basis.
Employees can elect Roth (after-tax) employer contributions
Effective immediately, employers may amend their plans to permit employees to elect that employer matching and non-elective contributions be made as Roth (after-tax) contributions as long as they are 100 percent vested when contributed to the plan.
Additional guidance is expected to address how plan sponsors should treat employee elections to have catch-up contributions made on a pre-tax basis if they exceed the income thresholds requiring Roth catch-up contributions.
Long-term part-time employees receive expanded eligibility
Prior to the SECURE Act 2.0, employees who worked between 500 and 999 hours for three consecutive years were required to be allowed to participate in their company's retirement plan. The SECURE Act 2.0 reduces the time period to two years, effective in 2025. This does not apply to employees who participate in collectively bargained plans or to nonresident aliens.
Student loan payments can be treated as retirement contributions for matching contributions
Beginning in 2024, student loan payments can be treated as retirement contributions for the purpose of qualifying for matching contributions in a workplace retirement account.
Employers will be able to contribute to their company retirement plan on behalf of employees who are paying student loans instead of saving for retirement. Employers may rely on the employees to certify annually the amount of their qualifying student loan payments.
Retirement plans can now include emergency savings accounts
Beginning in 2024, retirement plans may offer linked "emergency savings accounts" that permit non-highly compensated employees to make Roth (after-tax) contributions to a savings account within the retirement plan.
These retirement-linked emergency savings accounts are subject to detailed rules addressing eligibility, contributions and withdrawals.
- Balances in an emergency savings account must be eligible for distribution at least once per month.
- Withdrawal transactions are penalty-free and do not need to show a qualifying emergency cause.
- Employers may automatically enroll employees in these accounts at a rate of no more than three percent of eligible wages. Employees can opt out of participation.
- No further contributions can be made if the savings account has reached $2,500 (indexed) or a lesser limit established by the employer. Once the cap is reached, additional contributions can be directed to the employee's Roth-defined contribution plan (if they have one) or stopped until the balance falls below the limit.
- No employer contributions are permitted.
- Employee contributions must be eligible for the same matching contributions that apply for elective deferrals. Matching contributions are made to the retirement plan — not to the emergency savings account.
- Upon termination of employment, any emergency savings account can be converted to another Roth account within the plan or distributed to the participant.
This provision addresses a common objection to participation in retirement savings. For instance, if an employee fears that they may need any retirement contributions for unforeseen emergencies.
Additional early withdrawal exceptions added for emergency expenses
Generally, an additional 10 percent tax applies to early distributions from tax-deferred retirement accounts, such as 401(k) plans, unless an exception applies.
Beginning in 2024, the SECURE Act 2.0 provides new exceptions for early distributions.
Those new exceptions include:
- Up to $22,000 for expenses related to a federally declared disaster made within 180 days of the disaster occurring
- Terminal illness, defined as a condition that will cause death within seven years, as certified by a physician
- Up to $1,000 per calendar year for personal or family emergency expenses to meet unforeseeable or immediate family needs
- The lesser of $10,000 (indexed for inflation) or 50 percent of the account value for victims of domestic abuse
A new saver's match starts in 2027
Beginning in 2027, lower-income employees will be eligible to receive a federal matching contribution of up to $2,000 per year that will be deposited into their retirement savings account. The matching contribution is 50 percent of the employee's contributions but is phased out as income increases (for example, between $41,000 and $71,000 for married, filing jointly; $20,500 to $35,500 for single taxpayers, etc.). This match replaces the current saver's credit.
The age for required minimum distributions (RMDs) is going up
The requirement to begin taking RMDs will increase from age 72 to age 73 in 2023 and then again to age 75 in 2033. In addition, the penalty for not taking an RMD is reduced from 50 percent of the amount required to be withdrawn currently to 25 percent and to 10 percent if corrected within two years.
Employers can offer immediate incentives for participation
Currently, employers can only provide matching contributions as an incentive to participate in a retirement savings plan. Effective for plan years beginning after 2022, employers may offer modest financial incentives, such as gift cards, which may help increase participation.
IRS Notice 2024-02 clarified the rules for these incentives. For example:
- The value of the incentive should not exceed $250.
- Incentives are available only to employees currently not participating in the plan.
- Financial incentives are subject to the same tax, withholding and reporting requirements that apply to other employer-provided fringe benefits.
Small businesses receive an expanded tax credit for administrative costs
Currently, employers with fewer than 100 employees may be eligible for a three-year start-up tax credit of up to 50 percent of administrative costs, with an annual limit of $5,000. The SECURE Act 2.0 increases this credit to 100 percent of qualified start-up costs for employers with up to 50 employees.
An additional credit of up to $1,000 per employee for eligible employer contributions may apply to employers with up to 50 employees, but this phases out from 51 to 100 employees.
IRS Notice 2024-02 provided additional guidance for claiming these credits. One crucial clarification is that employers must be eligible for the credit in the year of plan adoption. For example, if an employer is not eligible in the first year of plan adoption, reducing the number of employees on staff cannot make the company eligible in subsequent years.
The Department of Labor will create a retirement Savings lost and found
The SECURE Act 2.0 establishes an online searchable database that will allow a participant or beneficiary to search for contact information for plan administrators of plans in which the participant or beneficiary may have a benefit.
Beginning in 2025, plans will be required to share information with the Department of Labor to be included in the database.
Error correction system will be expanded
The SECURE Act 2.0 expands the self-correction system known as the Employee Plans Compliance Resolution System (EPCRS) to allow more types of errors to be corrected internally and to exempt certain failures to make required minimum distributions from the excise tax. There are also new rules for correcting overpayments. These enhancements were effective upon enactment.
IRS Notice 2023-43 provided guidance for self-correction in qualified retirement plans and provided examples of failures that are not eligible for self-correction, such as:
- Certain demographic failures
- Failure to adopt a written plan document
- A "significant failure" in a terminated plan
- Operational failures corrected by plan amendments where a participant is treated less favorably than under the original plan terms
Next steps
Further analysis may be necessary. Again, the SECURE 2.0 Act contains some 90 changes to retirement savings plans which should be reviewed in depth for applicability. Some provisions may require amendments to existing retirement plans and offerings. Employers should consult with appropriate legal counsel and financial professionals to identify any changes that must be made and determine what optional provisions may be beneficial.
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