The SECURE Act 2.0 will bring about significant changes to retirement plan contributions and benefits. Among the changes are provisions that will affect automatic enrollment in 401(k) plans, eligibility requirements for part-time employees, and employer contributions to retirement savings plans. Key provisions of the SECURE Act 2.0 that have effective dates from the end of 2023 through 2025 are detailed below.
Changes Effective December 31, 2023
- Elimination of RMDs for Roth 401(k) and 403(b) Plans – Roth 401(k) and 403(b) plans will not require RMDs before the account owner’s death. This change does not apply to distributions that are required for plan years beginning before January 1, 2024, but are permitted to be paid on or after that date.
- RMDs for Surviving spouses – Surviving spouses can elect to be treated as the deceased employee for purposes of the RMD rules
- Student Loan Repayments Matching Contributions – Employers can count an employee’s qualified student loan payments as employee contributions towards their 401(k), 403(b), governmental 457(b), or SIMPLE IRA plan, which are eligible for an employer matching contribution. Plans can separately test employees who receive matching contributions for student loan repayments when doing nondiscrimination testing of elective contributions.
- Emergency Savings Accounts – Employers can add a short-term emergency savings account to their plans with up to $2,500 in after-tax Roth deferrals. Withdrawals are allowed once a month, and the first four per year are free. Contributions can be matched and rolled over. IRS and/or DOL guidance is needed before employers can implement this optional plan feature.
- Rothification of Catch-Up Contributions for High Earners – Catch-up contributions for participants aged 50 or older and earning over $145,000 in the prior year (indexed for inflation) must be Roth (after-tax). Additionally, retirement plan providers can offer automatic portability services, which means the plan can automatically move forced cash-outs into a default IRA or new employer’s retirement plan unless the participant chooses to opt out.
- Higher Forced Rollover Limit – The involuntary IRA rollover limit is increased from $5,000 to $7,000. Thus, workplace retirement plans can force a tax-free rollover distribution without the participant’s consent if the participant’s account is over $1,000 but less than $7,000 when the participant is otherwise eligible to receive a distribution from the plan.
- Retroactively Amending Plan to Increase Benefits – Employers can retroactively amend a workplace retirement plan to increase participants’ benefits for the prior plan year, so long as the amendment is adopted no later than the extended due date of the employer’s federal income tax return for such prior year.
- Waiver of Early Withdrawal Penalties for Certain Distributions – The Penalty for early withdrawals before age 59 1/2 is waived for certain cases. Participants can certify they meet the criteria for emergency expenses up to $1,000 per year for unforeseen personal or family emergencies and up to $10,000 or 50% of the vested account balance for domestic abuse. Participants can repay over three years, claim a refund for income taxes, and emergency distributions are prohibited for three years without repayment.
- Permanent Safe Harbor for Correcting Auto-Enrollment and Auto-Escalation Failures – The current safe harbor for correcting employee elective deferral elections, which is scheduled to expire on December 31, 2023, becomes permanent.
- 403(b) Hardship Distributions Conform to 401(k) Rules – SECURE 2.0 aligns the 403(b) plan hardship distribution rules with the 401(k) plan hardship distribution rules.
- Starter 401(k) or 403(b) Plans – Employers without a retirement plan can offer a new safe harbor “starter” deferral-only plan. Employees will be automatically enrolled at 3% to 15% of their compensation, with the same annual contribution limit as IRAs. These plans are exempt from most nondiscrimination testing rules.
- Separate Top-Heavy Tests Allowed – Employers can separately test excludable and non-excludable employees when determining whether the plan is top-heavy.
- SIMPLE Plan Updates – Employers can swap a SIMPLE IRA with a SIMPLE 401(k) that requires employer contributions. Employers with SIMPLE plans may make additional employer contributions of up to 10% of compensation or $5,000. Employers with fewer than 25 employees can increase deferral and catch-up contributions by 10%. For 26 to 100 employees, higher deferral limits are allowed with a 4% match or 3% contribution.
- Reform of Family Attribution Rules – Family attribution rules will be changed to relieve related businesses. One change helps spouses with separate businesses in different property states, and the other changes stock ownership rules for parents and minors.
- Indexing IRA Catch-Up Limit – The $1,000 catch-up limit for IRAs for individuals 50 and older will be indexed annually for inflation, in multiples of $100.
- Section 529 Rollovers – Beneficiaries of IRC Section 529 college savings accounts that have been open for more than 15 years can roll over up to $35,000 from any 529 account in their name to a Roth IRA over the course of their lifetime. Such rollovers are subject to annual contribution limits to Roth IRAs.
Changes Effective After December 31, 2024
- Uniform Rollover Forms – No later than January 1, 2025, the IRS must issue sample forms for direct rollovers that may be used by the distributing or receiving retirement plan or IRA.
- Retirement Savings Lost and Found – The DOL must create a lost and found database no later than December 29, 2024, to help reunite participants with money that they may have left behind in workplace retirement savings plans.
- Later RMDs – On January 1, 2025, the RMD starting age increases from 73 to 75.
- Mandatory Automatic Enrollment for New Plans – 401(k) and 403(b) plans adopted after December 29, 2022, must automatically enroll employees with a deferral rate between 3% and 10% starting in 2024. The rate will increase by 1% each year up to a maximum of 15%. Participants may opt out of the program.
- Catch-up Contribution Increases – Effective for taxable years beginning after December 31, 2024, the catch-up contribution limits for participants who are ages 60 to 63 will increase to the greater of (i) $10,000 or (ii) 150% of the regular catch-up contribution limit for 2024 (indexed for inflation after 2025).
- Coverage of Long-Term Part-Time Employees – Effective for plan years beginning after December 31, 2024, SECURE Act 2.0 decreases the part-time employee eligibility period for 401(k) and 403(b) plans to two years. It also extends the rule to ERISA 403(b) plans but does not apply to union or defined benefit plans.
- Distributions for Certain Long-Term Care Premiums – Effective December 29, 2025, retirement plans can distribute up to $2,500 per year to pay for certain long-term care insurance premiums. Such distributions are exempt from the 10% early withdrawal penalty that might otherwise apply.
The SECURE Act has made some important changes to retirement planning that could have a significant impact on you or your business. To find out how these changes impact your business or retirement plan specifically, reach out to a Capossela, Cohen advisor who can help you navigate the new rules and make informed decisions about your retirement plan.
To learn about the changes in the SECURE Act 2.0 that are already in effect, read our recent article, SECURE Act 2.0.