In December of 2022, the U.S. Congress passed the Consolidated Appropriations Act, 2023, which contains a large section covering retirement referred to as SECURE 2.0.
As a reminder, SECURE 2.0 is seen as building upon or enhancing the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act). Like its precursor, this robust piece of legislation included several enhancements designed to modernize the American retirement system by increasing coverage, encouraging retirement savings, and easing administrative burden for both plan sponsors and plan participants alike.
For a more detailed breakdown of The Act by section, download this Secure Act 2.0 Overview from Empower. Generally, however The Act can be broken down into the following summarized component parts:
Expanding Coverage and Increasing Retirement Savings
- Expanding Automatic Enrollment in Retirement Plans – Requires new 401(k) and 403(b) plans to include EACA with a minimum automatic deferral rate of 3% (not more than 10%) and annual 1% auto increases to 10% (not to exceed 15%). Amounts to be defaulted into QDIA. Does not apply to plans adopted before the effective date, governmental or church plans, plans sponsored by businesses in existence for less than 3 years, or plans maintained by employers with 10 or fewer employees. Effective for plan years after December 31, 2024.
- Small Employer Pension Plan Startup Credit – Increases credit for small employers (those with up to 50 employees) from 50% of startup costs to 100% (up to an annual cap of $5,000), and provides additional credit for employer contributions (per-employee cap of $1,000), excluding defined benefit plans. There are dollar limitations and a phase-in of the credit. These credits would be available to eligible employers if they adopt an existing plan (like a MEP or PEP). Effective for taxable years after December 31, 2022.
- Savers Credit Enhancement – The credit will be changed from a cash payment via tax refund to a federal matching contribution that must be deposited into a taxpayer’s IRA/retirement plan. The matching contribution will be 50% up to $2,000. The match is phased out between $41,000 – $71,000 for joint filers. It is subject to inflation adjustments on an annual basis making them more attractive. Effective for taxable years after December 31, 2026.
- 403(b) MEPs and PEPs – 403(b) plans may now participate in multiple employer plans (MEPs) or pooled employer plans (PEPs). Effective plan years after December 31, 2022.
- 403(b) Plans Use of Collective Investment Trusts (CITs) – CITs are pooled investment vehicles designed exclusively for use with qualified plans. These vehicles are alternatives to mutual funds or separate accounts and allow for greater flexibility in investment design and often times fee savings. They have been utilized by 401(k), 457, and other qualified plans for decades. Additional securities/banking legislation is still required to make these available in 403(b) plans. Stay tuned . . .
- Required Minimum Distributions (RMD) – Moves back the date by which retired participants are required to begin taking minimum distributions from their qualified plans. Age moved back to 73 starting on January 1, 2023, and to 75 starting on January 1, 2033. Surviving spouses can now elect to be treated as the deceased employee for RMD purposes. Effective for distributions after December 31, 2023.
- Special Needs Trust RMDs – Special needs trust established for a disabled beneficiary may now provide for a charitable organization as the remainder beneficiary. Effective calendar years after enactment of Act.
- IRA Catch Up Limit Indexed – Subject to a COLA adjustment going forward. Effective for tax years beginning after December 31, 2023.
- Increasing Catch Up Limits Within Plans – For participants who have attained age 60-63 before the close of the taxable year, the COLA adjusted catch up limit ($7,500 for 2023) will be raised to the greater of $10,000 or 150% of the regular limit in 2025. These limits will be indexed after 2025. Effective for taxable years after December 31, 2024.
- Matching Contributions for Student Loan Repayments – Employers can make matching contributions into their qualified retirement plans (401(k), 403(b), SIMPLE IRA) for employee repayments made on qualified student loans for higher education. Available to participants eligible to receive matching contribution, must use same formula used as matching contribution on deferrals, must use same vesting schedule as matching contribution on deferrals. Governmental employers are also permitted to do so in 457(b) or another plan with respect to such repayment. For nondiscrimination testing purposes, the plan may test separately employees who receive matching contributions on loan repayments. Effective for plan years after December 31, 2023.
- Military Spouse Retirement Plan Eligibility Credit for Small Employers – $200 per military spouse (non-HCE) plus 100% of employer contributions (up to $300) made on behalf of military spouse (maximum $500) credit for small employers utilizing certain eligibility parameters for military spouse. Effective after enactment of Act.
- Small Financial Incentives for Contributions – Plan sponsors may provide small incentives (like gift cards) to employees to spur employee deferrals. May not be paid for with plan assets. Effective after enactment of Act.
- Withdrawals for Emergency Expenses – 10% excise tax will not apply to distributions used for emergency expenses that are unforeseeable or an immediate financial need (personal or family emergency expenses). One distribution per year up to $1,000 is permitted and is repayable within 3 years (no additional emergency distributions during this period unless repayments are completed). Effective for distributions after December 31, 2023.
- SIMPLE Plan Contributions – Employer may make contributions to each employee in a uniform manner that cannot exceed the lesser of 10% of compensation or $5,000 (indexed). Effective for taxable years after December 31, 2023.
- SIMPLE Plan Catch Up Limits – Catch-up contribution at age 50 increased by 10% for employers with no more than 25 employees. Employers with between 26-100 employees can provide higher deferral limits as well, but only if they provide a 4% match or a 3% non-elective contribution. Effective taxable years after December 31, 2023.
- Nontrade/business SEP – Can provide domestic employees (e.g., housekeeper/nanny) retirement benefits under simplified employee pension (SEP). Effective taxable years after enactment of Act.
- Automatic Portability – Allows service providers to provide plans with automatic portability services. Includes automatic transfer of participant’s default IRA (from prior plan distribution) into new employer’s plan unless participant opts out. Effective 12 months after enactment of Act.
- Starter Plans – Employers that do not offer a retirement plan can offer a starter 401(k) or safe harbor 403(b). Auto enrollment at 3 -15% with annual limit same as IRA contribution limit and additional catch-up beginning at 50. Effective for plan years after December 31, 2023.
- Safe Harbor for Employee Elective Deferral Failures – If error (auto enroll or escalation) is corrected within 9½ months after end of year in which error occurred, favorably to participant and consistently among similarly situated participants, no penalty. Effective for errors after December 31, 2023.
- Long-Term Part-Time Eligibility Accelerated – Changes eligibility from three consecutive years of 500 hours worked, to two consecutive years of 500 hours worked. Also extends the long-term part-time coverage rules to ERISA 403(b) plans. Effective for plan years after December 31, 2024.
- 529 Rollover to Roth – Tax- and penalty-free rollover of unused dollars (up to $35,000) from 529 accounts to Roth IRA over lifetime of beneficiary. Subject to Roth IRA annual limits, and the 529 account must have been open for more than 15 years. Roth IRA owner must have includible compensation equal to or greater than rollover amount. Effective for distributions after December 31. 2023.
- Pension-Linked Emergency Savings Accounts (PLESA) – Employers may offer their non-HCEs emergency savings accounts that link to their retirement plans. If adopted, must auto enroll at up to 3% (capped at $2,500). Once the cap is reached, additional contributions directed to employee’s Roth (if they have one) or stopped until balance dips below maximum. Contributions receive Roth tax treatment and are included in calculating matching contributions. No fees or penalties can be charged to the first four distributions from the account. Portable at separation from service or can be rolled into Roth plan or IRA.
- ESOP Changes – Deferral of tax for certain sales of employer stock to ESOP of S-Corp. Certain securities treated as publicly traded for ESOP. Effective for sales made after December 31, 2027.
Preservation of Income
- Qualifying Longevity Annuity Contracts (QLACs) Made More Attractive – QLACs are designed to begin payment toward the end of an individual’s life expectancy. This helps to safeguard against running out of income later in life. May use up to $200,000 from account balance in defined contribution plan or IRA to purchase. The 25% limit would be removed and spouses would be allowed to share QLACs as joint and survivor annuities. Effective for contracts purchased/received on the date of enactment of the Act.
- ETFs – Makes access to exchange traded funds (ETFs) broader on variable annuity platforms. Effective for segregated asset account investments made on or after 7 years after the date of enactment of the Act.
- Partial Annuitization – Account owners may now elect to aggregate distributions from retirement accounts and annuities for purposes of determining RMDs. Effective with the enactment of the Act.
Simplification and Clarification of Retirement Plan Rules
- Recovery of Retirement Plan Overpayments – Statutorily provides that fiduciaries may or may not seek to recover inadvertent benefit overpayments, but if they do so, the Act puts certain rules in place: no interest or additional amounts can be sought, if repaid in installments the aggregate cannot exceed the amount of the overpayment, consideration of hardship imposed on the recipient, etc. Clarifies that failure to obtain repayment does not impact qualified status of plan. Effective with the enactment of the Act.
- Reduction in Excise Taxes – Excise taxes imposed for failure to take RMDs have been reduced from 50% to 25% and can be further reduced to 10% if corrected during a provided correction window. Effective for taxable years after enactment of the Act.
- Lost and Found – DOL directed to create a national online lost and found database for retirement plans. Database to be created no later than 2 years after the date of enactment of the Act.
- Performance Benchmark for Asset Allocation Funds – For designated investment alternatives (“DIA”) held by a plan, often target-date funds or other asset allocation funds, the fiduciaries may use a benchmark that is a blend of different broad-based securities market indices if: it’s reasonably representative of asset class holdings of the DIA, the blend is modified at least once per year to reflect changes in holdings of DIA, it’s given to participants in an easy-to-understand fashion, and each index used would meet requirements standing alone. DOL to update regulations no later than 2 years after enactment of the Act.
- Elimination of Notices and Disclosures – Certain disclosures, notices, and plan documents would not have to be provided to unenrolled employees if they are given an annual reminder of their eligibility with election deadlines and any document they request to which they are entitled to receive otherwise. They must be still given a Summary Plan Description. Effective for plan years after December 31, 2022.
- Increasing Cash-Out Limit – Changing the small amount cash-out threshold for terminated balances from $5,000 to $7,000. Effective for distributions after December 31, 2023.
- Expanding the EPCRS – Expanding corrections for loan errors, IRAs, and additional safe harbors. Rev. Proc. 2021-30 to update no later than 2 years from enactment of Act.
- Elimination of the “first day of the month” Requirement for Governmental 457 Plans – Elections may be made any time before compensation being deferred is available to participant. Effective taxable years after enactment of Act.
- Provisions Relating Firefighters and First Responders – Age 50 retirement rule extended to private firefighters, effective for distributions made after enactment of the Act. Also, exclude service-connected disability retirement payments from gross income upon attaining retirement age. Effective for taxable years after December 31, 2026.
- Top Heavy Rules and Excludable Employees – May perform top heavy test separately for excludable employees. Effective for plan years after December 31, 2023.
- Qualified Birth or Adoption Distributions (QBADs) – Repayment of QBADs restricted to 3 years. Effective retroactively to the 3-year period beginning with the date of distribution.
- Hardship Withdrawals – Administrators may rely on employee self-certifications of hardship requirements. Effective for plan years after enactment of the Act.
- 403(b) Hardship Withdrawals – Rules changed to mirror 401(k) rules. Effective for plan years after December 31, 2023.
- Domestic Abuse Distributions – Allow penalty-free distributions from plans for domestic abuse victims equal to lesser of $10,000 or 50% of account balance. Distributions may be repaid over 3 years. Effective for distributions after December 31, 2023.
- Family Attribution – Updates to stock-related ownership attribution rules to address the inequities of spouses living in community property versus separate property states and parent and minor children. Effective for plan years after December 31, 2023.
- Increase Benefit Accruals – Plans may be amended to allow for increase in participants’ benefits, by due date of employer’s tax return. Effective for plan years after December 31, 2023.
- Terminal Illness Distributions – Penalty-free distributions for terminally ill individuals. Effective for distributions after enactment of the Act.
- Long-Term Care Premium Payments for Governmental Plans – No longer have to have plan directly pay insurance premiums. Effective for distributions after enactment of the Act.
- Early Distribution – Extends penalty-free distributions to public safety officers with at least 25 years of service with the plan sponsor. Effective for distributions after enactment of the Act. Extends penalty-free distributions to corrections officers of state and local governments. Effective for distributions after enactment of the Act.
- Federally Declared Disasters – Creates permanent rules for Federally-declared disasters occurring on or after January 26, 2021 for affected individuals. Can take penalty-free distributions up to $22,000 from plan/IRA. Taken into income over 3- a year period and can be repaid. Amounts distributed prior to disaster for the purchase of a home can be recontributed and repayments of loans can be extended.
- SIMPLE to Safe Harbor – Employers can replace SIMPLE IRA with SIMPLE 401(k) or other 401(k) with required employer contributions, during the plan year. Effective for plan years after December 31, 2023.
- Long Term Care Bought with Retirement Dollars – Plans can make penalty-free distributions up to $2,500 annually for payment of premiums for high quality coverage, long term care insurance contracts. Effective 3 years after enactment of the Act.
- Correction of Mortality Tables – Secretary of Treasury to amend any pertinent regulations no later than 18 months after enactment of the Act.
- Benefit Statements – For defined contribution plans, only one benefit statement annually must be provided in paper. The other three quarterly statements may be provided electronically unless participant elects otherwise. For defined benefit plans the statement provided every 3 years must be on paper, unless participant elects otherwise. Effective plan years after December 31, 2025.
- Tribal Government – Tribal courts recognized as authorized under Federal law to issue qualified domestic relations orders (QDROs). Effective for orders after December 31, 2022.
- Department of Labor Undertakings – A myriad of directives for the DOL to report to the Government Accountability Office or Congress regarding disclosure consolidation and improvements and what information should be provided to participants to make financial decisions, impact of inflation on retirement plans, and pooled employer plans (PEPs). Various effective dates.
- Group of Plans – Plans filing under Group of Plans need only submit audit opinion if they have 100 participants or more. Effective after enactment of the Act.
- Cash Balance – Allows plan sponsors to provide larger pay credits for older employees with longer service Effective plan years after enactment of the Act.
Revenue Provisions
- Catch Up Contributions Treated as Roth – All catch up contributions will be subject to Roth treatment (unless the employee has compensation equal to or less than $145,000 indexed). Effective for taxable years after December 31, 2023.
- Treatment of Matching or Contributions as Roth – Provides participants with the option of matching contributions on deferrals or student loan repayments to be treated as Roth contributions (including taxability). Effective upon enactment of the Act.
- Retiree Health Benefits – Sunset extended (to end of 2032) on ability of employer to use assets from overfunded pension plan to pay retiree health/life insurance.
