The SECURE Act 2.0 Makes Major Changes to Retirement Plan Law

1. Newly-created retirement plans with employee deferral features will be required to automatically enroll employees in the plan at a contribution rate of at least 3% – of course, employees may affirmatively opt-out. Certain new companies (in business for less than three years) and small employers (10 or fewer workers) are exempt from this requirement. Beginning in 2025, for new retirement plans started after December 29, 2022, automatic escalation of automatic deferrals will be required, too, with exceptions. 

2. Effective January 1, 2023, the age at which minimum distributions must begin is now 73. In ten years, it will go up again to age 75. The penalties for failing to take the required minimum distributions are cut in half in 2023 – and reduced further if the mistake is corrected promptly.

3. Catch-up contribution limitations – for people ages 50 and older – have been increased from $6,500 per year to $7,500 per year as of 2023. In addition, in 2025, persons ages 60 to 63 will be able to make a $10,000 per year catch-up contribution. In addition, catch-up contributions will have to be on an after-tax (ROTH) basis unless the individual earns $145,000 or less.

4. Workplace plans – part-time workers – currently, employees who work between 500 and 999 hours for three consecutive years must be allowed to participate in the company retirement plan – this Act reduces that time to two years, beginning in 2025. This does not apply to collectively bargained plans or nonresident aliens.

5. Beginning in 2024, a plan can choose to make a matching contribution on behalf of employees who are making payments on student loans.

6. Leftover 529 Plan balances – beginning in 2024, up to $35,000 can be rolled over into a qualified retirement plan – if the 529 Plan has been in existence for at least 15 years – but no funds have been contributed in the prior five years (or earnings thereon) can be rolled over.

7. Effective in 2023, an employer can amend its plan to permit employees to elect that matching contributions or nonelective contributions go to a Roth 401(k) account – so long as the contributions are 100% vested.

8. A retirement plan “lost and found” database will be created. This will allow a participant to search for plan administrators in which the participant (or beneficiary) may have an interest. Plans will have to submit this information to the Department of Labor beginning in 2025.

9. The number of things that can be self-corrected internally by a plan (which do not require a submission to the IRS or DOL) has increased. In addition, there are new rules for correcting overpayments by a plan. Although a plan has the right to attempt to collect an overpayment, under these new rules, a plan can choose not to collect an overpayment without adverse consequences.

10. Emergencies – the new law permits employers to add provisions to their plans to help non-highly compensated employees save for emergencies. These special emergency savings accounts are not part of the traditional plan funds – and amounts in the emergency savings account can be withdrawn by the plan participant at any time. No more than $2,500 may be kept in the emergency savings account.

11. Emergency plan withdrawals of up to $1,000 annually are permitted when unforeseeable or immediate family expenses arise. The distributions are not subject to the 10% early withdrawal penalty. Only one such distribution may be made in a year, and there is a right to “repay” for three years if desired. Employers may also add withdrawal provisions that are exempt from the 10% early withdrawal penalty for terminally ill participants and for those who are victims of domestic abuse. These effective dates vary.

12. Disaster distributions are now exempted from the 10% early withdrawal penalty – so long as no more than $22,000 is withdrawn, the residence of the plan participant is in a federally declared disaster area, and the participant sustains an economic loss as a result of the disaster. The qualifying disaster-related distribution can be included in income spread over three years – or the individual can repay the distribution amount within three years. Higher plan borrowing limits (up to $100,000 or, if lesser, the vested plan account balance) and longer repayment times for disaster loans are also permitted under the new law.

These are brief summaries of a few of the most relevant changes – many more changes were adopted. Stay tuned for more details and guidance concerning these changes that will be forthcoming from the government.

What should employers do to ensure compliance with the SECURE Act 2.0?

If you have a plan vendor that updates your plan document, reach out to them to be sure you elect to bring desired optional items into the operation of your plan in a timely manner.

In our experience, plans that auto-enroll participants often fail to properly and timely auto-enroll employees – or if they auto-escalate, they fail to properly and timely auto-escalate. These mistakes can be costly for an employer to fix. Employers should establish a calendar with sufficient lead time to accurately and timely auto-enroll and auto-escalate participants (if your plan contains these provisions) to avoid mishandling the process. More and more retirement plans appear to include auto-enroll and auto-escalate features.

If you have questions about the options available or any other retirement planning questions, please reach out to Mac McLean.