SECURE 2.0 Act – Key Changes Impacting Employers and Its Employees

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As a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019, Congress passed the SECURE 2.0 Act in December 2022, which aimed to provide even more retirement options for American workers. The latest legislation includes a significant amount of provisions impacting retirement plan providers and its employees. Below is a summary of key provisions employers and employees should be aware of to prepare for what's to come.

Employer Impact

  • Automatic enrollment and plan portability. Beginning in 2025, new 401(k) and 403(b) plans must automatically enroll eligible participants, starting at a 3% contribution rate. Businesses or organizations exempt from this provision include small businesses (10 or fewer employees), new businesses (in operation for less than three years), and church or governmental plans. Employees may opt out of either plan.
  • Changes to long-term, part-time employees. Effective for plan years beginning in 2025, the eligibility service period for long-term, part-time employees is shortened to two consecutive 12-month periods from its three consecutive 12-month periods. The latest provision also extends the long-term, part-time employee provision to 403(b) plans subject to ERISA.
  • Student loan payments. Beginning in 2024, employers may make matching contributions under a 401(k) or 403(b) plan on employees' qualified student loan payments to help them save while paying off debt.
  • New pension-linked emergency savings accounts (ESA). Beginning in 2024, plan sponsors may add pension-linked ESAs to their defined contribution retirement plans and governmental plans for non-highly compensated employees. These accounts are part of the plan document but accounted for separately. Plan sponsors may automatically opt their employees into these accounts at a rate of no more than 3% of their compensation, and all contributions must be made on an after-tax basis.
  • Recovery of retirement plan overpayments. Effective immediately, retirement plan fiduciaries have the discretion to not recoup overpayments mistakenly made to retirees, which was previously required to be recovered under both the Employee Retirement Income Security Act and Internal Revenue Code. Should a plan fiduciary choose to recoup overpayments, recovery efforts are subject to certain limitations and protections to help safeguard retirees.
  • Annual employee benefit audits for a group of plans. Employers with a group of plans (added by the SECURE Act) will be required to submit audited financial statements for each plan if it has 100 participants or more. Plans with fewer than 100 participants included in a group of plans are not required to submit audited financial statements.
  • Top-heavy test for excludable employees. Employers may now perform the required top-heavy test separately on non-excludable and excludable employees, effective for plan years beginning after Dec. 31, 2023.
  • Expansion of the Employee Plans Compliance Resolution Systems (EPCRS). The EPCRS is expanded to allow more types of errors to be rectified through the Internal Revenue Service (IRS)’s self-correction program at any time, effective immediately.
  • Expanded benefits to 403(b) plans. Under the new act, 403(b) plans are now also eligible for hardship withdrawals and the long-term, part-time employee provision, which was originally introduced in the 2019 SECURE Act, applying only toward 401(k) plans. Additionally, 403(b) plans are now allowed to invest in collective investment trusts.
    • Beginning in 2023, 403(b) plans can join a multiple employer plan (MEP) or pooled employer plan (PEP), which should help smaller employers start plans for their employees to participate in

Employee Impact

  • Changes to Required Minimum Distributions (RMDs). The RMD age will increase from 72 to 73 years old beginning Jan. 1, 2023, and later to 75 years old beginning Jan. 1, 2033. Beginning in 2023, the RMD penalty will decrease to 25% from its current 50% of the RMD amount not taken. The penalty can be reduced to 10% for Individual Retirement Accounts (IRAs) if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.
    • Starting Jan. 1, 2024, employer-sponsored Roth accounts will be exempt from the RMD requirements.
  • Higher catch-up contributions. Beginning Jan. 1, 2025, individuals between 60-63 years old can make catch-up contributions of up to $10,000 annually, indexed for inflation. The current catch-up amount is $7,500 for individuals 50 years old and older, and beginning in 2024, the $1,000 IRA catch-up contribution limit will be indexed for inflation for individuals who meet this threshold.
    • Also going into effect beginning Jan. 1, 2024, all catch-up contributions must be Roth contributions for individuals who earn more than $145,000 annually.
  • New “Saver's Match” rule. The current “Saver’s Credit” has been repealed and replaced by a new "Saver's Match” rule which matches an IRA/retirement plan contribution for certain individuals who make contributions to employer retirement plans. The match is 50% of the employee’s contributions (up to $2,000) and is phased out as income increases. This new rule goes into effect beginning in 2027.
  • Withdrawals for emergency expenses. Generally, individuals must pay an additional 10% tax when taking early distributions from their retirement plans. In the latest legislation, this penalty tax is waived for emergency expenses related to unforeseen or immediate financial needs. Only one distribution is allowed per year of up to $1,000, and it can be repaid within three years.
  • Increased dollar threshold for mandatory distributions. The involuntary distribution threshold is increased from $5,000 to $7,000 for distributions after Dec. 31, 2023.

While most plan amendments required by the SECURE 2.0 Act do not need to be made until the end of the first plan year beginning on or after Jan. 1, 2025, plan sponsors are encouraged to work with their benefit plan advisors to plan ahead and ensure compliance as these new rules become effective. To obtain assistance, contact a member of our dedicated Employee Benefit Plan Group today.

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Janice Fortin
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Janice Fortin is a Principal at Doeren Mayhew with over 30 years of experience in public accounting.

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