Secure Act 2.0 & the Major Changes to Retirement Plans

HR 2617, also known as the Consolidated Appropriations Act of 2023, was signed into law on December 29, 2022. This act includes revisions to current laws that affect retirement savings plans.

These provisions are collectively known as Secure 2.0 since they build on the 2019 SECURE Act. Secure 2.0 offers several new benefits to both employees and employers. Its provisions are designed to encourage employers to provide retirement plans and improve employees’ retirement outcomes.

So what are some of the provisions included in Secure 2.0, and how will these significant changes impact retirement plans? Let’s dive in.

Automatic Enrollment

One provision applies to employers that start new retirement plans after December 29, 2022. In 2025, those employers will be required to enroll employees automatically into that retirement plan. In addition, the rate for the retirement plan must be at least 3% but not more than 10% of the employee’s qualifying wages.

The plan must allow all enrolled employees to withdraw any earnings and automatic contributions within three months of the first contribution without being subjected to the 10% early withdrawal penalty.

Of course, employees can choose to opt out of the retirement plan.

There are exceptions for:

  • New companies that have been in business for less than three years
  • Employers with ten or fewer employees

Companies that meet either of the above two qualifications are excluded from the requirement.

Automatic Escalation

Starting in 2025, for any new retirement plans activated after December 29, 2022, contribution percentages automatically increase on the first day of each plan year by 1%. This escalation begins after the employee completes one year of service and continues until the contribution amounts to 10% of their eligible wages.

Increased Catch-Up Contributions

Participants 50 or older can now contribute an additional $7,500 annually to their 401(k) accounts.

After 2025, this amount will increase to $10,000 annually for participants ages 60 to 63.

Optional Roth Treatment

The optional Roth treatment provision is effective immediately. It dictates that employers can amend their plans to allow employees to specify that any nonelective or employer-matching contributions may be made as after-tax Roth contributions. This rule applies only to employees who are 100% vested during plan contribution.

Extended Eligibility for More Employees

The retirement plan must include long-term part-time employees (employees who work between 500 and 999 hours each year for three years consecutively).

New Considerations for Student Loan Payments

From 2024, student loan payments can be considered retirement contributions and are eligible for matching contributions from an employer. If you take advantage of this provision, your employer may require you to provide proof of your qualifying student loan payments.

Linking Emergency Savings Accounts

Starting in 2024, retirement plans for non-highly compensated employees can be linked to emergency savings accounts. This provision allows these employees to make after-tax contributions to a savings account linked to their retirement plans.

Emergency savings account balances are eligible for distribution at least once per month. These withdrawals are penalty-free and do not require substantiation.

Employers can opt employees into these accounts at a maximum of 3% of eligible wages. Of course, employees can opt out of participating in these emergency savings accounts.

Employee contributions to these accounts are eligible for the same matching contributions as elective deferrals. However, the matching contributions cannot be made to the savings account but to the retirement plan.

If the employee is terminated, their emergency savings account may convert to a Roth account or be directly distributed to them.

Required Minimum Distributions (RMDs)

In 2023, the required age for taking RMDs will increase from 72 to 73. In 2025, the age will increase to 75. Additionally, penalties for not taking required minimum distributions will decrease from 50% to 25%.

Expanded Credit

Employers with fewer than 100 employees are eligible for a three-year start-up tax credit. This tax credit applies to up to 50% of the company’s costs related to administering the retirement plan, with a yearly limit of $5,000. Secure 2.0 increases the credit from 50% to 100% for employers with 50 employees or fewer.

Your Next Steps Following Secure 2.0

These are just some of the new provisions enacted in Secure 2.0. To ensure you maximize your retirement benefits, we invite you to schedule a discovery meeting with our team of financial professionals. We will walk you through the changes to retirement plans and outline how to take full advantage of them to work toward your retirement goals. Contact us today to get started!

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.