Retirement savings is one area where there seems to be willingness in both political parties to work together in a bipartisan manner. In the last ten years, sixteen states have started retirement savings programs to help workers who do not have access to an employer sponsored retirement plan and others are looking further at similar plans. Congress passed the original Secure Act in 2019 and shortly after its passage started working on additional regulation to help Americans save for retirement. Secure Act 2.0 was passed and signed into law late last year.
Secure Act 2.0 has over ninety provisions applying to individual savers and businesses that offer a retirement plan with the changes phasing in over the next several years. Below are some of the highlights that apply to businesses and organizations that sponsor retirement plans:
Provisions to Expand Plan Coverage and Increase Savings
- Increased Tax Credits: For new plans starting in or after 2023, tax credits already available are increased to help offset the cost of starting a retirement plan. For employers with fifty or fewer employees the tax credit increases to 100% of administrative cost with a maximum credit of $5,000. Additionally, businesses can get tax credits of up to $1,000 per employee for employer contributions for employees who earn less than $100,000 in the plan’s first year. This credit decreases by 25% each of the following three years. These expanded credits are phased out for employers with 51 to 100 employees.
- Automatic Features: Any 401(k) or 403(b) plan that is established after the date of enactment of Secure Act 2.0 must, for plan years beginning after December 31, 2024, contain automatic provisions. Plans will have to automatically enroll participants at a minimum of 3% and up to a maximum of 10%. Contributions will automatically increase 1% annually to at least 10% and with a maximum of 15%. Employees will have the ability to opt out of both features. Governmental, church plans, and employers that have been in existence three years or less or have fewer than 10 employees are exempt.
- Student Loan Repayments: Plan sponsors will be able to make matching contributions to 401(k), 403(b), and nongovernmental 457(b) plans to employees who make qualified student loan repayments. These matching contributions will be treated as regular matching contributions for discrimination testing purposes. This is intended to help employees who are paying off student loans and not able to save for retirement. This provision is effective for plan years beginning after 2023.
- Roth Contribution Options: Plans can give employees the ability to elect employer contributions to be made on a Roth basis. These contributions would have to be fully vested when they are made. This provision is effective immediately, but there will need to be some IRS clarification as well as time for recordkeepers to update their systems.
- Catch Up Contributions: Employees over age 50 are eligible to make an additional “catch up” contribution which is $7,500 in 2023. Starting for tax years after December 31, 2024, employees who turn ages 60 – 63 in the plan year will have an increased catch-up limit of $10,000 or 150% of the regular over 50 catch up amount. Another provision effective for tax years after 2023 mandates that catch up contributions for employees making over $145,000 be made on a Roth basis.
- Required Minimum Distributions (RMDs): The required age for starting RMDs increases to 73 starting on January 1, 2023 and increases further to age 75 starting January 1, 2033. Distributions from Roth balances in employer sponsored plans will no longer be required after December 31, 2023, aligning the rules of Roth IRAs and Roth balances in employer plans.
- Reduce Notices for Unenrolled Participants: Effective for plan years beginning after 2022, employers no longer must provide unenrolled participants with most plan notices to employees who are not enrolled in the plan. An annual notice would be required reminding employees of eligibility and enrollment deadlines.
- Hardship Withdrawal Certification: Effective with the bill’s passage, plan sponsors can rely on a participant’s self-certification for hardship events and the amount needed to satisfy the financial need.
- Small Balance Cash Out Limit: Currently a terminated employee with a balance of $5,000 or less can be forced out of the plan after being provided notice. Effective for plan years starting after December 31, 2023, this limit is increased to $7,000.
- Paper Statement: Participants in defined contribution plans must be sent one paper statement annually, unless the participant elects the statement be provided electronically. For defined benefit plan, participants must receive a paper statement once every 3 years.
- Expanded Self Correction: plan sponsors will have expanded ability to self-correct additional types of errors without an IRS filing. The Department of Labor is also required to coordinate its Voluntary Fiduciary Compliance Program with the updated regulation.
Secure Act 2.0 contains many provisions, some of which are mandatory, others being optional and will be phased in over several years. Fragasso will continue to work with our retirement plan clients and guide them through any changes to the plan that are required or could be appropriate for the company and its employees. If you are looking to start a plan or interested in a second opinion on your existing plan, I’d be happy to have those conversations.