By: Claudia G. Allen
Last December, Congress passed the SECURE 2.0 Act, a massive piece of legislation with many provisions affecting retirement plans. Some become effective in 2023 and others in later years, with regulations to come further explaining how these new laws will be put into practice. In order to help you plan, I have summarized some key provisions below:
New 401(k) and 403(b) Plans: Beginning in 2025, employers who start a new 401(k) or 403(b) plan will be required to automatically enroll eligible employees at 3%, increasing by 1% each year up to 10%, with a maximum of 15% of compensation. In 2022, small employers with fewer than 100 employees were eligible for a tax credit of 50% of administrative costs for 3 years, up to a maximum of $5,000 per year. The new law, effective in 2023, increased the credit for small employers with fewer than 50 employees to 100% of qualified expenses for 3 years, and adds another credit of up to $1,000 per employee for employer contributions. The increased credit is phased out for employers with 51-100 employees.
RMD Changes: Beginning in 2023, the age at which distributions will be required has increased to 73 (for a person who attains age 72 after 12/31/2022 and age 73 before 1/1/2033) and will again increase in 2033 to 75 (for an individual who attains age 74 after 12/31/32). The excise tax of 50% for RMD failures has been reduced to 25% and ill be further reduced to 10% if timely corrected.
Catch-Up Limits: Catch-up limits for those age 50 or older will be indexed for inflation starting in 2024. Starting in 2025, those who are age 60, 61, 62 and 63 will be permitted to save $10,000 as a catch-up or 150% of the prior year catch-up limit. Starting in 2024, all catch-up contributions to qualified plans will be treated as ROTH contributions except for participants with compensation of $145,000 or less (as indexed) in the prior year.
Including Part-Time Workers in 401(k) Plans: Employees who work at least 500 hours in three consecutive years 2021, 2022 and 2023 must be allowed to participate in their employers’ 401(k) plans in 2024 in order to make 401(k) salary deferrals. Employees working at least 500 hours in 2023 and 2024 will be able to make 401(k) or 403(b) salary deferrals starting in 2025 if they work two years.
Employer nonelective and matching contributions may be made as ROTH contributions at the election of the participant. There will be no required distribution from a ROTH 401(k) beginning in 2024.
Withdrawals of up to $1,000 per year may be made in the event of personal emergencies and terminal illness beginning in 2024. No penalty will be assessed and the withdrawal may be repaid within 3 years. Domestic abuse victims may withdraw the lesser of $10,000 or 50% of the vested account balance. In the event of federally declared disasters, up to $22,000 per participant may be withdrawn without a 10% penalty which may be recontributed within 3 years.
Emergency Savings Accounts will be available for employers to implement for non-highly compensated employees starting in 2024. The provisions allow an automatic 3% ROTH salary deferral up to $2,500 which may be matched by the employer. Withdrawals will not be taxable.
Matching Student Loan Payments: Starting in 2024, employers may make matching contributions as if loan repayments were salary deferrals.
Cashouts: Employers have been able to unilaterally distribute plan benefits of terminated participants with account balances of $5,000 or less. In 2024, the dollar figure for involuntary cashouts will increase to $7,000.
A Section 529 Plan special distribution provision effective in 2024 allows distribution of a 529 account maintained for a designated beneficiary for at least 15 years to be directly rolled into a ROTH IRA maintained for the benefit of the designated beneficiary tax-free (limited to contributions and earnings accrued at least 5 years prior to the rollover and capped at $35,000).
If you have any questions about SECURE 2.0, please contact Claudia Allen at cgallen@strausstroy.com.