Preface: What the caterpillar calls the end of the world, the Master calls the butterfly – Richard Bach
SECURE Act 2.0: Encouraging Individuals to Save
The SECURE 2.0 Act of 2022 (SECURE Act 2.0) is designed to build upon the provisions of the original SECURE Act to increase participation and boost retirement savings. In part, the SECURE Act 2.0 does this by making important changes to retirement contribution and required minimum distribution rules to help individuals with plan selection and opportunities that encourage retirement savings.
Retirement Plan Participation
One of the most broadly applicable provisions of the SECURE Act 2.0 requires that, effective for plan years beginning after 2024, 401(k) and 403(b) sponsors automatically enroll employees in plans once they become eligible to participate in the plan. Under the requirement, the amount at which employees are automatically enrolled cannot be any less than three percent of salary, and no more than ten percent. The amount of employee contributions is increased by one percent every year after automatic enrollment, increasing to at least 10 percent but not more than 15 percent of salary. Employees can opt out of the automatic enrollment if they choose or have such contributions made at a different percentage.
In addition, the SECURE Act 2.0 reduces the length of service requirements for part-time employees to participate in sponsored plans from three years to two years. As women are more likely to work part-time than men, this provision is particularly important for women in the workforce. The SECURE Act provides that except in the case of collectively bargained plans, employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or 3 consecutive years of service where the employee completes at least 500 hours of service. The SECURE Act 2.0 reduces the three-year rule to 2 years, effective for plan years beginning after December 31, 2024.
Catch-Up Limits
The annual amount that can be contributed to a retirement plan is limited, and this limitation amount is generally subject to annual adjustments for inflation. For plan participants aged 50 or older, the contribution limitation is increased (“catch-up contributions”). For 2023, the amount of the catch-up contribution is limited to $7,500 for most retirement plans, and $3,500 for SIMPLE plans, and is subject to inflation increases. Under the SECURE Act 2.0, a second increase in the contribution amount is available for participants aged 60, 61, 62, and 63, effective for tax years after 2024. For most plans, this “second” catch-up limitation is the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the catch-up contribution for participants not aged 60 through 63. Like the “standard” catch-up amount, these limitations are subject to inflation adjustment.
Under current law, catch-up contributions to a qualified retirement plan can be made on a pre-tax or Roth basis (if permitted by the plan sponsor). For tax years beginning after December 31, 2023, the SECURE Act 2.0 provides that all catch-up contributions to qualified retirement plans are subject to Roth tax treatment.
The annual limit on contributions to individual retirement accounts (IRAs) is also increased for participants aged 50 and older. The “catch-up” limit for IRAs is currently $1,000. Unlike the catch-up amount for other plans, this amount is not subject to increases for inflation under current law. The SECURE Act 2.0 makes the IRA catch-up amount adjusted annually for inflation for tax years beginning after 2023.
Saver’s Credit
Lower-income individuals may be eligible for the retirement savings contribution credit (saver’s credit) for contributions and deferrals to certain retirement plans. The credit also applies to contributions to ABLE accounts for tax years beginning after December 22, 2017, and before January 1, 2026. Currently, the credit is equal to the taxpayer’s applicable percentage, based on filing status and adjusted gross income, multiplied by up to $2,000 in total qualified retirement savings contributions. The maximum credit is $1,000. For tax years beginning after 2026, the saver’s credit is simplified from its current three-tier structure based upon income amounts to a unified 50 percent credit amount, with a phaseout for higher incomes. After 2027, the phaseouts for income are adjusted for inflation.
Required Minimum Distributions
Under current law, as enacted as part of the original SECURE Act, plan participants are required to begin taking distributions (“required minimum distributions” or “RMDs”) at age 72. Under the SECURE Act 2.0, the age at which participants must begin taking distributions is increased over a period of ten years. Starting in 2023, the age is increased to 73 for individuals who turn 72 after 2022 and age 73 before 2033. For individuals who turn 74 after 2032, RMDs must begin at age 75. The SECURE Act 2.0 also reduces the penalty on failures to take a required minimum distribution from 50 percent to 25 percent. The 25 percent penalty is further reduced to 10 percent if corrective action is taken in a timely manner. The reduction is effective for tax years beginning after 2022.
Additional Provisions
The SECURE Act 2.0 includes several other provisions meant to expand participation and boost retirement savings. These additional improvements include:
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- Eliminating an actuarial test in the regulations relating to required minimum distributions that limits the use of certain annuities in defined contribution plans and individual retirement accounts. The modification makes it possible for participants to make elections to use annuities that provide only a small financial benefit but important guarantees (calendar years after 2022)
- Allowing SIMPLE IRAs to accept Roth contributions and granting the ability to treat employee and employer simplified employee pension contributions as Roth contributions (tax years after 2022)
- Allowing employers to make matching contributions to employee plans for the employee’s student loan payments (plan years beginning after 2023)
- Allowing employers to give employees de minimis low-cost incentives, like gift cards, to incentivize employee contributions to qualified plans (plan years beginning after 2022)
- For tax years beginning after 2025, the required date for the onset of disability increases from age 26 to age 46 for designated beneficiaries of an ABLE account. Beneficiaries are allowed tax-free rollovers of 529 plan account balances to Roth individual retirement accounts starting in 2024.
- A surviving spouse may elect to be treated as if the surviving spouse were the employee for purposes of determining the date for required minimum distributions.
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The changes under provisions of the SECURE Act 2.0 may affect your retirement plan contribution and distribution options. Please call our office if you’d like more information.