SECURE 2.0 Introduces Sweeping Changes to Retirement Rules
January 5, 2023
By: Maureen H. Milmoe
Federal lawmakers recently passed the SECURE 2.0 Act of 2022 (SECURE 2.0), a retirement security package that will introduce some of the most comprehensive changes to retirement policy in recent years. Tucked in the omnibus appropriations package, SECURE 2.0 will expand access to and provide incentives for employer-sponsored retirement plans.
Building on the SECURE Act enacted in 2019 (SECURE 1.0), SECURE 2.0 adds important new rules to existing retirement saving laws.
Key provisions in SECURE 2.0 include:
Automatic Enrollment in Most New Retirement Plans
Effective for plan years beginning after Dec. 31, 2024, new 401(k) and 403(b) plans are required to automatically enroll participants, with a salary deferral percentage of at least 3% but not more than 10%. Each year thereafter, a participant's salary deferral amount will be increased by 1% until it reaches 10% (this amount may be increased by the plan sponsor to a maximum of 15%). An employee can opt out of participation if desired. Small businesses with 10 or fewer employees, new businesses (those in business less than three years) and church and government plans are exempt from this provision. Current 401(k) and 403(b) plans are grandfathered and do not need to comply with this requirement.
Increased RMD Age
SECURE 1.0 increased the age to commence required minimum distributions from retirement plans (RMDs) from age 70.5 to age 72. Starting on Jan. 1, 2023, SECURE 2.0 increases the required minimum distribution age to 73 (for individuals who attain age 72 after Dec. 31, 2022 and age 73 before Jan. 1, 2033). By 2033, the RMD age will increase to age 75 (for individuals who attain age 74 after Dec. 31, 2032).
Increased Catch-up Contributions
For participants 50 or older, participants can make catch-up contributions to retirement plans up to set limits. Effective for taxable years beginning after Dec. 31, 2024, SECURE 2.0 increases the catch-up contribution limits to the greater of $10,000 or 50% more than the applicable catch-up amount for participants who have reached ages 60, 61, 62, or 63 years old. The increased catch-up contribution limits will be indexed for inflation after 2025. Effective for plan years after 2023, catch-up contributions for participants with wages from the employer in the prior year of greater than $145,000 (as adjusted) must be made as Roth contributions.
Student Loan Matching Contributions
Acknowledging that high student loan debt prevents employees from saving for retirement, SECURE 2.0 will permit an employer to make matching contributions under certain retirement plans with respect to employees making "qualified student loan payments." A qualified student loan payment is not limited to government loans and is broadly defined as any loan taken for higher education expenses. Employers may elect to offer matching contributions for qualified student loan payments for plan years beginning after Dec. 31, 2023.
Emergency Savings
Effective for distributions made after Dec. 31, 2023, participants are permitted to withdraw once per year up to $1,000 from tax-preferred retirement accounts without an early-withdrawal tax penalty for emergency purposes. Participants can repay this amount in three years and may not make another withdrawal for emergency purposes for a period of three years, unless the earlier withdrawal is repaid. Effective for plan years beginning after Dec. 31, 2023, employers can also offer a retirement plan-linked emergency savings account to non-highly compensated employees. The employer-sponsored emergency plan provides a maximum account balance of $2,500 and permits four penalty-free withdrawals per year.
Retirement Coverage for Long-Term Part-Time Employees
For plan years beginning on or after Jan. 1, 2025, employers maintaining a 401(k) plan must have a dual eligibility requirement under which part-time employees can become eligible for 401(k) enrollment upon completing either one year of service in which the employee completes 1,000 hours of service during the applicable 12-month period or two consecutive years of service in which the employee completes 500 hours of service in each such 12-month period. This change reduces the current SECURE Act 1.0 three-year rule to two years. This provision also extends the long-term part-time rules to 403(b) plans subject to ERISA. Similar to the SECURE Act 1.0 rule, this requirement does not apply to collectively bargained plans. It also does not require employer contributions (e.g., matching or nonelective) to be made with regard to such part-time employees.
Small Balance Cashout Dollar Limit
Under current law, a plan may generally distribute a participant’s account balance without consent if the balance is less than $5,000 and the benefit is distributable. Effective for distributions made after Dec. 31, 2023, this amount is increased to $7,000.
Small Incentives for Retirement Plan Participation
Starting with the 2023 plan year, Secure 2.0 permits employers to offer de minimis financial incentives, not paid with plan assets, such as low-dollar gift cards, to increase employee participation in employer-sponsored retirement plans.
Plan Compliance Resolution System
SECURE 2.0 expands the Employee Plans Compliance Resolution System (EPCRS) to (1) allow more types of errors to be corrected internally through self-correction, (2) apply to inadvertent IRA errors, and (3) exempt certain failures to make required minimum distributions from the otherwise applicable excise tax. SECURE 2.0 also adds new correction procedures related to addressing plan overpayments. Further guidance for plan sponsors is required to be promulgated by 2025.
Plan Amendments
Employers implementing changes under SECURE 2.0 must make plan amendments by the last day of the first plan year beginning on or after Jan. 1, 2025 (2027 in the case of governmental plans or collectively bargained plans) if the plan operates in accordance with such amendments.
SECURE 2.0 introduces significant changes to the requirements governing retirement plans and the implementation of this complex set of laws likely will present many challenges for plan sponsors. In addition to the changes described in this information memo, SECURE 2.0 contains a number of other modifications that impact retirement plan administration. Please look out for future communications from us regarding the impact of SECURE 2.0.
If you have any questions about complying with SECURE 2.0, changes to your plan design, or the information presented in this memo, please contact Maureen Milmoe, any attorney in our employee benefits and executive compensation practice or the attorney at the firm with whom you are regularly in contact.
SECURE 2.0 Introduces Sweeping Changes to Retirement Rules
January 5, 2023
By: Maureen H. Milmoe
Federal lawmakers recently passed the SECURE 2.0 Act of 2022 (SECURE 2.0), a retirement security package that will introduce some of the most comprehensive changes to retirement policy in recent years. Tucked in the omnibus appropriations package, SECURE 2.0 will expand access to and provide incentives for employer-sponsored retirement plans.
Building on the SECURE Act enacted in 2019 (SECURE 1.0), SECURE 2.0 adds important new rules to existing retirement saving laws.
Key provisions in SECURE 2.0 include:
Automatic Enrollment in Most New Retirement Plans
Effective for plan years beginning after Dec. 31, 2024, new 401(k) and 403(b) plans are required to automatically enroll participants, with a salary deferral percentage of at least 3% but not more than 10%. Each year thereafter, a participant's salary deferral amount will be increased by 1% until it reaches 10% (this amount may be increased by the plan sponsor to a maximum of 15%). An employee can opt out of participation if desired. Small businesses with 10 or fewer employees, new businesses (those in business less than three years) and church and government plans are exempt from this provision. Current 401(k) and 403(b) plans are grandfathered and do not need to comply with this requirement.
Increased RMD Age
SECURE 1.0 increased the age to commence required minimum distributions from retirement plans (RMDs) from age 70.5 to age 72. Starting on Jan. 1, 2023, SECURE 2.0 increases the required minimum distribution age to 73 (for individuals who attain age 72 after Dec. 31, 2022 and age 73 before Jan. 1, 2033). By 2033, the RMD age will increase to age 75 (for individuals who attain age 74 after Dec. 31, 2032).
Increased Catch-up Contributions
For participants 50 or older, participants can make catch-up contributions to retirement plans up to set limits. Effective for taxable years beginning after Dec. 31, 2024, SECURE 2.0 increases the catch-up contribution limits to the greater of $10,000 or 50% more than the applicable catch-up amount for participants who have reached ages 60, 61, 62, or 63 years old. The increased catch-up contribution limits will be indexed for inflation after 2025. Effective for plan years after 2023, catch-up contributions for participants with wages from the employer in the prior year of greater than $145,000 (as adjusted) must be made as Roth contributions.
Student Loan Matching Contributions
Acknowledging that high student loan debt prevents employees from saving for retirement, SECURE 2.0 will permit an employer to make matching contributions under certain retirement plans with respect to employees making "qualified student loan payments." A qualified student loan payment is not limited to government loans and is broadly defined as any loan taken for higher education expenses. Employers may elect to offer matching contributions for qualified student loan payments for plan years beginning after Dec. 31, 2023.
Emergency Savings
Effective for distributions made after Dec. 31, 2023, participants are permitted to withdraw once per year up to $1,000 from tax-preferred retirement accounts without an early-withdrawal tax penalty for emergency purposes. Participants can repay this amount in three years and may not make another withdrawal for emergency purposes for a period of three years, unless the earlier withdrawal is repaid. Effective for plan years beginning after Dec. 31, 2023, employers can also offer a retirement plan-linked emergency savings account to non-highly compensated employees. The employer-sponsored emergency plan provides a maximum account balance of $2,500 and permits four penalty-free withdrawals per year.
Retirement Coverage for Long-Term Part-Time Employees
For plan years beginning on or after Jan. 1, 2025, employers maintaining a 401(k) plan must have a dual eligibility requirement under which part-time employees can become eligible for 401(k) enrollment upon completing either one year of service in which the employee completes 1,000 hours of service during the applicable 12-month period or two consecutive years of service in which the employee completes 500 hours of service in each such 12-month period. This change reduces the current SECURE Act 1.0 three-year rule to two years. This provision also extends the long-term part-time rules to 403(b) plans subject to ERISA. Similar to the SECURE Act 1.0 rule, this requirement does not apply to collectively bargained plans. It also does not require employer contributions (e.g., matching or nonelective) to be made with regard to such part-time employees.
Small Balance Cashout Dollar Limit
Under current law, a plan may generally distribute a participant’s account balance without consent if the balance is less than $5,000 and the benefit is distributable. Effective for distributions made after Dec. 31, 2023, this amount is increased to $7,000.
Small Incentives for Retirement Plan Participation
Starting with the 2023 plan year, Secure 2.0 permits employers to offer de minimis financial incentives, not paid with plan assets, such as low-dollar gift cards, to increase employee participation in employer-sponsored retirement plans.
Plan Compliance Resolution System
SECURE 2.0 expands the Employee Plans Compliance Resolution System (EPCRS) to (1) allow more types of errors to be corrected internally through self-correction, (2) apply to inadvertent IRA errors, and (3) exempt certain failures to make required minimum distributions from the otherwise applicable excise tax. SECURE 2.0 also adds new correction procedures related to addressing plan overpayments. Further guidance for plan sponsors is required to be promulgated by 2025.
Plan Amendments
Employers implementing changes under SECURE 2.0 must make plan amendments by the last day of the first plan year beginning on or after Jan. 1, 2025 (2027 in the case of governmental plans or collectively bargained plans) if the plan operates in accordance with such amendments.
SECURE 2.0 introduces significant changes to the requirements governing retirement plans and the implementation of this complex set of laws likely will present many challenges for plan sponsors. In addition to the changes described in this information memo, SECURE 2.0 contains a number of other modifications that impact retirement plan administration. Please look out for future communications from us regarding the impact of SECURE 2.0.
If you have any questions about complying with SECURE 2.0, changes to your plan design, or the information presented in this memo, please contact Maureen Milmoe, any attorney in our employee benefits and executive compensation practice or the attorney at the firm with whom you are regularly in contact.
