The Secure 2.0 Act, a nearly 400-page package of multiple retirement plan reforms that will have widespread implications for businesses and induvial retirement investors was signed just before the turn of the new year. This act, which is actually a combination of three different bills from both the House and Senate addresses many different areas of current retirement plan regulations. Below are a few summaries of some of the changes that we believe will impact business owners and investors the most.
Please note that while most provisions will go into effect January 1, 2025, plan sponsors need to work with their record keeper and advisor to be aware of the various time frames for each specific law (such as catch-up contribution and tax credit changes in 2023) and how to manage them accordingly.
I. Mandatory Automatic Enrollment/Escalation
a. requires employers who establish new defined contribution plans to automatically enroll newly hired employees, when eligible, in the plan at a pretax contribution level of 3 percent of the employee’s pay.
b. This level would increase annually by 1 percentage point up to at least 10 percent
c. These provisions apply to new 401(k) and 403(b) plans established after the legislation’s enactment date, as current plans would be grandfathered.
d. There is also an exception for small businesses with 10 or fewer employees, those in business for less than three years, church plans and governmental plans.
II. Increased Catch-Up Contributions
a. Starting January 1, 2025, individuals ages 60 through 63 years old will be able to make larger catch-up contributions up to $10,000 annually to a workplace plan, and that amount will be indexed to inflation.
b. The catch-up amount for people age 50 and older in 2023 stays set at the current $7,500 (indexed for inflation).
III. Roth only Catch-up Contributions
a. Starting in 2024, all catch-up contributions to employer-sponsored plans for employees earning more than $145,000 in the prior year must be made to Roth accounts, allowing the government to tax these dollars sooner.
b. Roth account contributions are made with post-tax dollars that can be withdrawn tax-free after retirement.
c. Catch-up contributions currently can be made on either a pretax or Roth basis (if permitted by the plan sponsor).
IV. Roth Matching Contributions
a. Starting in 2023 plan sponsors would have the option of permitting employees to elect that some or all of their matching contributions be treated as Roth contributions for 401(k) plans.
b. Currently, employer matching contributions must be paid into employees’ pretax 401(k) accounts.
c. Employer matching contributions designated as Roth contributions would not be excluded from employees’ gross taxable income.
V. Delay Mandatory Distributions
a. SECURE Act 2.0 further increases the age for starting RMDs to:
i. 73 starting in 2023 (for individuals who reach age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2030).
ii. 74 starting in 2030 (for individuals who reach age 73 after Dec. 31, 2029, and age 74 before Jan. 1, 2033).
iii. 75 starting in 2033 (for individuals who reach age 74 after Dec. 31, 2032).
VI. Student Loan Matching
a. Allows employers to make 401(k) matching contributions based on employees’ student loan payments
b. The matching contributions for student loan payments must vest under the same schedule as other matching contributions.
VII. Increase awareness of “Retirement savings contributions savers credit”
a. SECURE Act 2.0 also would attempt to increase public awareness of the Retirement Savings Contributions Credit (also known as the saver’s credit), which is available to low- and moderate-income workers.
b. tax credit for making eligible contributions to your IRA or employer-sponsored retirement plan.
c. the amount of the credit is 50%, 20% or 10% of contributions you make to a traditional or Roth IRA, or other group retirement plan like a 401k
|Credit Rate||Married Filing Jointly||Head Of Household||All Other Filers|
|50% of your contribution||AGI not more than $43,500||AGI not more than $32,625||AGI not more than $21,750|
|20% of your contribution||$43,501- $47,500||$32,626 – $35,625||$21,751 – $23,750|
|10% of your contribution||$47,501 – $73,000||$35,626 – $54,750||$23,751 – $36,500|
|0% of your contribution||more than $73,000||more than $54,750||more than $36,500|
VIII. Emergency Savings Accounts “ESAs” Linked to Retirement Plans:
a. Effective for plan years beginning after December 31, 2023, SECURE Act 2.0 allows sponsors of individual account plans (such as 401(k) or 403(b) plans) to create “emergency savings accounts” that permit non-highly compensated employees to make Roth after-tax contributions to a special savings account within the retirement plan.
b. Balances in an emergency savings account must be eligible for distribution at least once per month, and contributions cannot be made to an emergency savings account that would cause the balance to exceed $2,500 (adjusted for inflation after 2024).
c. Importantly, an employee’s contributions to the emergency savings account must be eligible for matching contributions at the same matching rate established under the plan for elective deferrals (but the matching contributions are not made to the emergency savings account).
IX. Tax Credits for Small Employers:
a. Under current law, employers with less than 100 employees that adopt a new retirement plan may qualify for an annual tax credit for up to three years equal to 50% of the administrative cost of establishing the plan, or (2) $5,000.
b. To the lesser of $250 multiplied by the number of NHCEs who are eligible to participate in the plan, or $5,000.
c. Effective for 2023, SECURE Act 2.0 increases the percentage from 50% to 100% for employers with 50 or fewer employees.
X. New Small Business Retirement Plan Tax credit for employer contributions
a. Small businesses with up to 50 employees will receive a new tax credit based on a percentage of employer contributions, up to $1,000 per employee for employees making less than $100,000 in the prior year.
b. Eligible employers with between 51 and 100 employees qualify for a credit phase-in equal to: A percentage of 2% points for each employee for the preceding taxable year in excess of 50 employees.
c. The annual credit is:
i. 100% in the first and second years
ii. 75% in the third year
iii. 50% in the fourth year
iv. 25% in the fifth year