Justin Bonestroo, Senior Vice President, Retirement Plan Consultant
What Plan Sponsors Need to Know About SECURE Act 2.0
As recession fears mount, it's more important than ever for retirement plan sponsors to ensure that participants are maximizing their retirement benefits.
Recessions usually have a significant impact on consumers' spending habits, and therefore saving for retirement is a luxury that many employees cannot afford in the current economic climate. Many would likely rather maximize their take-home pay than their 401(k) contributions. Some participants may even be considering withdrawing money from their retirement funds. Ultimately, it’s your responsibility as a plan sponsor to ensure that your participants’ needs are being met during these uncertain times.
Congress recently passed sweeping legislation designed to support both retirement plan sponsors and participants. According to Congress, employer-sponsored retirement plans are like a well-oiled machine; these plans work well when they’re readily available and maintained properly. With SECURE Act 2.0, legislators have greased the wheels of the American retirement system to help it support an evolving workforce amid a volatile economy.
It's important to be aware of these upcoming changes so you can ensure that your company is prepared to update your retirement plan design accordingly. Furthermore, the provisions in SECURE Act 2.0 are representative of broader trends within the retirement plan industry, which you should be staying on top of as well.
The provisions of SECURE 2.0, some optional and some required, will become effective at different times over the next several years. The law’s 93 provisions focus on expanding access to plans, increasing contribution limits and incentives, clarifying existing rules, raising revenue, and simplifying administrative processes. Many of these goals are accomplished by embracing the benefits of automation and the revenue-raising capabilities of Roth accounts.
Plan sponsors should take note of the following provisions that will take effect this year:
- 107 – Change in RMD age. Increases RMD age to 73 if participant attains age 72 after 12/31/2022 and age 73 before 1/1/2033. Increases RMD age to 75 for persons who attain age 74 after 12/31/2032.
- 302 – Reduce RMD excise tax. Reduces excise to 25%. May reduce to 10% if the RMD shortfall is corrected during a two-year window.
- 604 – Roth treatment of employer contributions. Employee designates whether match and/or nonelective are Roth.
- 113 – Financial incentives to participate. Allows participants to receive small de minimis financial incentives (such as small dollar amount gift cards) for contributing to a 401(k) or 403(b) plan. These incentives cannot be paid with plan assets.
- 312 – Self-certify hardship distributions. Plan sponsors can rely on an employee’s self-certification that (1) they had a safe harbor event; (2) the distribution is not in excess of the financial need; and (3) they have no other means to satisfy the need. A similar rule applies to 457(b) plans.
- 326 – Distributions to terminally ill patients. Creates an exception to 10% penalty on early qualified plan distributions for terminally ill participants.
- 349 – PBGC Premium variable rate freeze. Removes indexing of variable rate premium and sets premium at $52 for every $1,000 of underfunding.
- 331 – Federal disaster rules made permanent. Up to $22,000 may be distributed to an individual in connection with a qualified federally declared disaster. This amount is exempt from the 10% early withdrawal tax and its inclusion in gross income can be spread out over the course of three years.
The following provisions will not take effect until after 2023 has ended:
- 603 – Roth requirement for catch-up; effective after 12/31/2023. Applies to participants whose prior calendar-year FICA wages were more than $145,000 (indexed for inflation).
- 304 – Cash out $5,000 to $7,000; effective after 12/31/2023. Automatic rollovers, force-outs and QJSA exempt distribution limit changed from $5,000 to $7,000.
- 120 – Auto portable accounts; effective after 12/31/2023. Automatic rollovers, force-outs and QJSA exempt distribution limit changed from $5,000 to $7,000.
- 110 – Student loan matching; effective after 12/31/2023. Applies to 401(k), 403(b), SIMPLE IRAs and governmental 457(b) plans.
- 314 – Penalty-free distributions in case of domestic abuse; effective after 12/31/2023. Amount not to exceed lesser of $10,000 (indexed) or 50% of employee's vested account balance.
- 115 – Emergency withdrawals; effective after 12/31/2023.
- 127 – Emergency savings accounts; effective after 12/31/2023. ESAs must be funded with after-tax contributions and are capped at $2,500 (indexed for inflation). Once cap is reached, additional contributions can be made to Roth account or stopped. Participants must be allowed to take one withdrawal per month.
- 316 – Retroactive amendments; effective after 12/31/2023.Allows plans to be amended up to tax return due date to increase benefits.
- 332 – Mid-year conversion from SIMPLE to Safe Harbor 401(k); effective after 12/31/2023. Employers will be allowed to replace a SIMPLE IRA with a safe harbor 401(k) plan mid-year.
- 310 – Top-heavy exclusions; effective after 12/31/2023. Allows a top-heavy plan that covers otherwise excludable employees (under 21 and one year of service) to perform separate top-heavy testing for excludable and non-excludable employees.
- 101 – Mandatory automatic enrollment; effective after 12/31/2024. Plans adopted after 12/29/22 will be required to automatically enroll eligible participants at a default rate of 3%, which participants can opt out of.
- 125 – Long-term part-time employee eligibility; effective after 12/31/2024. Employees with two consecutive years of at least 500 hours of work must be eligible for the plan. During 2024, the waiting period will be three years according to the original SECURE Act.
- 109 – Increased catch-up for ages 60-63; effective after 12/31/2024. Increased catch-up for 401(k), 403(b) and Governmental 457(b) plans equal to the greater of $10,000 or 50% more than regular age 50 catch-up amount (indexed for inflation).
- 325 – Roth not subject to RMD; effective after 12/31/2024. Roth IRAs currently exempt from RMD requirements, but Roth plans are not exempt. Change exempts Roth retirement plan accounts from pre-death RMD rules.
- 315 – Family attribution rules; effective after 12/31/2023.Removes attribution for spouses with separate and unrelated businesses who reside in community property states and between parents with separate and unrelated businesses who have minor children.
- 350 – Correction of auto-enroll failures; effective after 12/31/2023. Makes permanent the EPCRS safe harbor for correcting automatic enrollment and/or automatic escalation failures, which was set to expire on 12/31/2023.
- 103 – Savers Match; effective after 12/31/2026. Modifies Saver’s Credit from a tax credit to a government matching contribution to individual’s IRA or eligible retirement plan.
With a recession looming and the markets more volatile than ever, the SECURE Act 2.0 legislation will help you as a plan sponsor respond to these changes appropriately and confidently.
Investment advisory services provided through CBIZ Investment Advisory Services, LLC, a registered investment adviser and a wholly owned subsidiary of CBIZ, Inc.