Secure Act 2.0 – What Should Employers Know?
Question: What should we know about the new “Secure Act 2.0” and how will it impact our retirement plan?
Answer: On Dec. 29, 2022, President Biden signed the Consolidated Appropriations Act of 2023, an omnibus bill that includes the “SECURE Act 2.0.” The SECURE Act 2.0 is intended to increase employees’ retirement savings. It makes numerous important changes that employers should be aware of. Some key provisions for 401(k) and 403(b) plans include the following:
- Expanding Automatic Enrollment – To boost participation in retirement plans, employers with new 401(k) and 403(b) plans will be required to automatically enroll employees in their plans (unless employees opt out) at a rate of at least 3% but not more than 10% of eligible wages. This change is effective for plan years beginning after Dec. 31, 2024. Retirement plans that existed on Dec. 29, 2022, are not subject to this requirement.
- Increasing Catch-up Contributions – Employees age 50 and older can contribute an extra $7,500 (for 2023) to their retirement accounts as a “catch-up contribution.” Beginning in 2025, this limit will increase to $10,000 (or, if greater, 150% of the regular catch-up contribution amount) for employees age 60 to 63. The increased amount will be indexed for inflation after 2025.
- Roth Treatment for Catch-up Contributions – Beginning in 2024, catch up contributions must be made on a Roth (after-tax) basis. However, employees whose prior year wages do not exceed $145,000 (indexed for inflation) can make these contributions on a pre-tax basis.
- Optional Roth Treatment for Employer Contributions – Effective immediately, employers may provide employees with the option of receiving any employer matching contributions on a Roth (after-tax) basis.
- Expanded Eligibility for Long-term, Part-time Employees – Under current law, 401(k) plans must allow part-time employees to participate after they complete three consecutive years of service (with at least 500 hours of service). Effective for plan years beginning after Dec. 31, 2024, the three-year rule is reduced to two years.
- Student Loan Payments as Matching Contributions – Effective for plan years beginning after Dec. 31, 2023, the Act allows employers to make matching contributions with respect to qualified student loan payments.
- Withdrawals for Emergency Expenses – Generally, an additional 10% tax applies to early distributions from tax-preferred retirement accounts, such as 401(k) plans, unless an exception applies. Beginning in 2024, the Act provides an exception for certain distributions for emergency expenses, which are generally unforeseen immediate financial needs relating to personal or family emergency expenses.
Keep in mind that these are only some of the changes made by the Secure Act 2.0. Employers should consult with the AdvanStaff HR retirement plan service team regarding the Act’s provisions, including how to incorporate the changes into their plans and communicate the new rules to employees.