The SECURE 2.0 Act was signed into law on December 29, 2022, and the implications for both business owners and savers are prevalent. Some of the important highlights include potential savings for employers, the increased emphasis on Roth options, and the additional savings assistance allowed for savers within plans.
The legislation builds on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and provides many changes intended to fill previous gaps and strengthen the retirement system as well as the retirement readiness of Americans.
Here are highlights of some important provisions within the new legislation.
Increased Tax Credits for Employers
Beginning in 2023, eligible businesses with 50 or fewer employees can qualify for a credit equal to 100 percent of the administrative costs for establishing a workplace retirement plan. The original SECURE Act gave startup businesses with up to 100 employees a tax credit equal to 50% of administrative costs, capped annually at $5,000. Eligible businesses with 51 to 100 employees remain subject to the original SECURE Act provision.
Also beginning in 2023, eligible businesses with up to 100 employees might be entitled to a tax credit based on their employee matching or profit-sharing contributions. This credit, which caps at $1,000 per employee, phases down gradually over five (5) years and is subject to further reductions for employers with 51 to 100 employees.
With these incentives, most of the admin/advisory costs (in some cases all the costs) can be offset.
Changes to Required Minimum Distributions
Beginning January 1, 2023, the age at which retirement account owners must start taking required minimum distributions (RMDs) will increase to 73. The current age to begin taking RMDs is 72, so individuals will have an additional year to delay taking a mandatory withdrawal of deferred savings from their retirement accounts.
Starting in 2023, the penalty for failing to take an RMD will decrease to 25% of the RMD amount not taken, down from the current 50%. The penalty will be reduced to 10% for IRA owners if the account owner withdraws the previously neglected RMD amount and submits a corrected tax return in a timely manner.
Additionally, Roth accounts in employer retirement plans will be exempt from the RMD requirements starting in 2024.
Increased Catch-up Contributions
Starting January 1, 2025, individuals ages 60 through 63 years old will be able to make catch-up contributions up to $10,000 annually, up from $7,500 in 2023 for participants aged 50 and older, and that amount will be indexed to inflation.
It should be noted that if you earn more than $145,000 in the prior calendar year, all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars.
IRAs currently have a $1,000 catch-up contribution limit for people aged 50 and over. Starting in 2024, that limit will be indexed to inflation based on federally determined cost-of-living increases, likely increasing future limits.
Matching for Roth Accounts
Employers will be able to provide employees with the option of receiving vested matching contributions to Roth accounts. Previously, matching in employer-sponsored plans were only made on a pre-tax basis. Contributions to a Roth retirement plan are made after-tax, allowing earnings to grow tax-free.
Qualified Charitable Distributions (QCDs)
Beginning in 2023, people aged 70½ and older may elect as part of their QCD limit a one-time gift up to $50,000, adjusted annually for inflation, to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. This is an expansion of the type of charities that can receive a QCD. This amount counts toward the annual RMD, if applicable.
Changes for Retirement Annuities
Qualified longevity annuity contracts (QLACs) are deferred income annuities purchased with retirement funds typically held in an IRA or 401(k) that begin payments on or before age 85. Starting January 1, 2023, the dollar limitation for premiums increases to $200,000 from $145,000. The law also eliminates a previous requirement that limited premiums to 25% of an individual’s retirement account balance.
Automatic Enrollment and Plan Portability
Starting in 2025, new defined contribution plans are required to automatically enroll employees once they become eligible (as defined in by the employer) to participate in the employer’s retirement plan. These employees would be enrolled with a 3% pre-tax contribution that gradually increases by 1% each year, up to at least 10% but not more than 15% of the employee’s earnings. Employees can opt out of participation before they become eligible or within the first 90 days.
Legislation also permits retirement plan service providers to offer plan sponsors automatic portability services, transferring an employee’s low balance retirement accounts to a new plan when they change jobs.
Emergency Savings Account
Starting in 2024, for non-highly compensated employees, defined contribution retirement plans can designate a Roth account as an emergency savings account that is eligible to receive participant contributions. Contributions would be limited to $2,500 annually (or lower, as specified by the employer) and the first 4 withdrawals in a year would be tax-free and penalty-free. Depending on plan rules, contributions may be eligible for an employer match.
Student Loan Debt
Starting in 2024, employers will be able to “match” employee student loan payments with matching payments to a retirement account, giving workers an extra incentive to save while paying off educational loans.
529 Plan Assets
After 15 years of existence, 529 plan assets can be rolled over to a Roth IRA for the beneficiary. This is subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. The ability to rollover to a Roth maintains future tax-free growth and tax-free withdrawals.
SECURE 2.0 provides additional opportunities for retirement savings, but all business owners and retirement savers have different financial situations. Do not hesitate to consult a financial advisor or tax professional to understand how SECURE 2.0 changes apply to your individual situation.
