Late last year, the House and Senate approved the revision to the SECURE Act of 2019, and the President signed it into law on December 23, 2022. This revision had been in process for some time, and Secure 2.0 sought to bring changes and updates to the original SECURE Act, affecting qualified retirement plans and their administration. These changes seek to increase participation, increase retirement savings and assist plan participants with distributions from the plan in certain conditions. Let’s look at some of the changes by the year in which they take effect.
Required Minimum Distributions
The Required Minimum Distribution (RMD) age has been raised so that individuals turning 72 in 2023 or later will begin RMDs at age 73. By 2033, those turning 74 will begin RMDs at age 75. In addition, there are now lower penalties for a participant missing RMD payments: 25% of the payment instead of the 50% previously levied, and as low as 10% if the error is self-corrected within two years.
Another big change for RMDs is that they are no longer due from Roth 401(k) balances. Please note that this only applies to the Roth part of the participant’s plan balance. Previously, RMDs were required from qualified plans, but not Roth IRAs, so an employee would need to roll their Roth 401(k) balances in the plan over to a Roth IRA if they wanted to avoid RMDs.
Related Read: RMDs Are Back: Here Is How To Soften the Tax Blow
Matching and special savings accounts
In 2024, there are a few notable changes, some of which serve to help plan participants.
Employers will be able to contribute a matching contribution into a qualified retirement plan for qualified student loan payments; previously, a match could only be made for contributions into the plan by the participant via payroll, such as pre-tax or Roth deferrals. The match will be put into the retirement plan, while the loan payments are sent to the lender.
Additionally, the plan can be amended to allow the “Sidecar Savings Provision,” which is a special kind of account that is associated with the plan. Employees would be able to put after-tax money away into this account, which could be matched by the employer, if that employer decides to do so. While contributions into this account do count towards plan contribution limits for the year, the account is limited to a lifetime cap of $2,500 in contributions by the participant. This account is kept separate from the other plan participant assets. An emergency withdrawal provision built into these accounts allows for a special withdrawal of up to $1,000 annually for emergencies (no documentation needed), which can be paid back into that account within three years via payroll.
Plans may also add similar provisions for withdrawals that are associated with those who are terminally ill or for victims of domestic abuse. There will be clarification when these may be available.
Cash-out Limits raised
Finally, for 2024, the amount allowed for mandatory cash-outs has been raised to $7000 (from $5,000). These cash-outs help to keep plan records organized and reduce the overall plan administration, as they force out terminated participants. This also helps because notices and statements will no longer be sent out to these participants once they are out of the plan.
Automatic Enrollment, Participation and Catch-up Contributions
2025 will bring a few more changes: New 401(k) and 403(b) plans will have automatic enrollment built into them as a mandatory feature. The initial rate of deferrals will be set at a rate between 3-10%, escalating by 1% annually until the deferrals reach 10-15%. Existing plans will not be affected. Auto-enrollment and auto-deferral increase participation in the plan and may help discrimination testing.
Part-time employees that are over 21 and have completed at least 500 hours in two consecutive 12-month periods will be able to participate in the deferral portion of a plan. This shortens the original three-year provision in SECURE 1.0. This could add a new layer of recordkeeping to ensure that eligibility is being calculated correctly.
Catch-up contributions have also been substantially altered. Generally, any plan participant who has reached 50 is eligible for a catch-up deferral, which is an amount in addition to the normal deferral limit ($7500 in 2023). In 2025, as there will be an additional $10,000 catch-up amount available to plan participants between 60-63.
Please note that if a participant’s income is greater than $145,000, all catch-up contributions will be Roth contributions.
Related Read: Year-End Spending Package Tackles Retirement Planning, Conservation Easements
SECURE 2.0 permanently exempts certain withdrawals from the 10% early withdrawal penalty if they are due to disaster relief. These must meet the following criteria:
- The withdrawal is not greater than $22,000;
- The participant’s primary residence is in a federally-declared disaster zone; and
- The participant has sustained an economic loss.
These distributions can now be included in income over a three-year period, or the distribution can be repaid in three years.
Loans may be taken for disaster relief as well.
Secure 2.0 has other provisions for establishing new plans and extending tax credits for those employers who want to establish a plan, including solo 401(k)s. These will be covered in more detail in the future. For now, the updates that SECURE 2.0 brings will affect plan participation, increase retirement savings and increase ease of withdrawals, but add a layer of complexity to plan recordkeeping. In order to take advantage of some of the allowable provisions, your plan document will need to be amended. To ensure your plan is accommodating these changes, contact ORBA or your Plan Administrator.
For more information, contact Joe D’Alconzo or your ORBA advisor at 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Services.