Many Washington-watchers were predicting that no tax legislation could pass a bitterly divided Congress in the election year of 2022, but against all odds, a pension bill called “SECURE Act 2.0” (a follow-up to the SECURE Act passed a couple of years ago) was inserted into the Consolidated Appropriations Act—one of those “must-pass” pieces of legislation—during the last few days of December. It is mostly good news, except for an unfortunate “revenue-raiser” (the catch-up rule described below) added to make the bill “revenue neutral” and thus more palatable to legislators, and the usual Congressional disregard of administrative burden. The following is a brief description of those SECURE Act 2.0 provisions most relevant to our clients, listed in order of their effective dates:
1. Provisions effective in 2023:
The age at which a required minimum distribution (“RMD”) must be taken out of a retirement plan or IRA is increased from 72 to 73 on January 1, 2023, and will increase to 75 on January 1, 2033. (The odd timing delay of that second increase is another legislative trick, since costs more than 10 years in the future do not have to be scored as a “revenue-loser” in legislation.)
The excise tax on underpayment of an RMD is decreased from 50% to 25% (and further decreased to 10% if cured quickly). The value of these changes is questionable since, in the past, the IRS has tended to waive all tax upon presentation of a “good excuse”, and lower taxes may make the IRS less inclined to waive.
New and enhanced tax credits are given for the cost of starting up new retirement plans for small employers.
Plans may—but are not required to—permit employees to treat matching and fully-vested profit-sharing contributions as Roth (i.e., currently taxable but tax-free along with earnings at distribution).
Employers are granted latitude to decide whether to recoup accidental overpayments of pension distributions.
The $100,000 annual charitable contribution limit for IRAs will now be indexed to inflation, and an additional one-time $50,000 contribution may be made in any year.
An employer may accept a participant’s “self-certification” that he or she has a hardship qualifying for a hardship plan withdrawal, simplifying the administrator’s duty of inquiry. (Under current law, a participant may self-certify that a hardship withdrawal is not in excess of the amount required to satisfy the need, but may not self-certify as to the existence of the hardship itself.)
Employers may offer de minimis financial incentives, such as small gift cards, to encourage participation in their retirement plans, so long as such incentives are not paid for with plan assets.
SECURE Act 1.0 allowed for early distributions from plans for qualified births or adoptions. SECURE Act 2.0 sets the repayment period for such distributions at 3 years from the date the distributions were received.
There is now an exception to the 10% penalty for distributions before age 59½ for individuals who are terminally ill.
Effective December 29, 2023, a retirement plan service provider may automatically transfer the balance in a participant’s default IRA (from a former employer’s plan) into the participant’s new employer’s retirement plan, unless the participant elects otherwise.
2. Provisions effective in 2024:
Plans may—but are not required to—make 401(k) matching contributions for participants who make certain student loan repayments, without negatively affecting discrimination testing.
A participant may take a plan distribution of up to $1,000 per year to meet a personal or family emergency without incurring the 10% penalty for distributions before age 59½, and may repay such distribution within 3 years and get back taxes paid.
Similarly, a participant may take a plan distribution of up to the lesser of $10,000 or 50% of his or her vested account balance per year for individual cases of domestic abuse without incurring the 10% penalty for distributions before age 59½, and may repay such distribution within 3 years and get back taxes paid.
The cash-out limit will be increased from $5,000 to $7,000, and such amount may be rolled into an IRA unless the participant objects.
A beneficiary of a Section 529 college savings account will be able to roll up to $35,000 over his or her lifetime into a Roth IRA without tax or penalty.
SECURE Act 1.0 reduced the period over which many beneficiaries may take plan distributions. SECURE Act 2.0 will now lengthen this period for some participants by permitting an older surviving spouse to be treated as the deceased participant for the purpose of calculating his or her RMD.
SECURE Act 2.0 made permanent an IRS rule that 401(k) plans which use automatic enrollment or automatic deferral escalation (techniques which have been shown to increase deferrals, but which are complicated to administer and thus prone to mistakes) will be able to “self-correct” errors without penalty within 9½ months after the end of the plan year in which the errors occurred.
403(b) plan hardship withdrawal rules will be conformed to mirror those of 401(k) plans.
And here’s the “revenue-raiser” stuck into the bill: Starting in 2024, a participant whose annual compensation is over $145,000 (indexed) who elects to make catch-up deferrals (deferrals by age 50+ employees in excess of the usual 401(k) limits) will have those deferrals treated as Roth contributions (i.e., currently taxable). This will force those plans which do not otherwise include Roth provisions to add them if they have employees earning over the limit. There’s no policy reason for this change; it just raises money for the IRS.
Now Roth accounts in retirement plans are no longer required to make pre-death distributions, mirroring Roth IRA accounts.
The IRS has been directed to expand the EPCRS self-correction program for plan errors by the end of 2024.
Employers may offer non-highly compensated participants “emergency savings accounts” tied to retirement plans, subject to contribution and withdrawal limits.
Retroactive plan amendments for a prior plan year will be allowed if they increase participant benefits, so long as any such plan amendment is adopted by the employer’s tax return deadline.
The DOL has been instructed to create a national online database for former participants to search for plan administrator contact information. Plans will be required to report certain information on former employees to the DOL.
3. Provisions effective in 2025:
If an employer with over 10 employees which has been in business for more than 3 years adopts a new 401(k) plan, that plan must have auto-enrollment of at least 3% of pay and auto-escalation up to at least 10% (but not more than 15%) of pay. The plan must also provide that employees who do not want such contributions may take such contributions out within 90 days.
401(k) plans must allow long-term part-time employees who have completed at least 500 hours of service in each of 2 consecutive years (reduced from 3 consecutive years) to make elective deferrals under the plan, even if they are otherwise excluded as part-timers or by a class exclusion. This will not affect discrimination testing, but it will still entail an administrative burden. This rule is being extended to apply to 403(b) plans.
The catch-up contribution limits are being increased to the greater of $10,000 or 50% of a participant’s regular catch-up contribution for individuals who are age 60 to age 63. This odd provision was added in response to lobbying by airline pilots.
4. Provisions effective after 2025:
Starting in 2027, the Saver’s Tax Credit against taxes otherwise owed for individuals who make contributions to IRAs or retirement plans shall be replaced with a federal matching contribution that will be deposited into an individual’s IRA or retirement plan account. The match is 50% of IRA or retirement plan contributions up to $2,000 per individual. The match phases out at certain income thresholds.
Starting in 2028, S-corporation shareholders may defer up to 10% of their gain from the sale of stock to an ESOP.
Starting in 2033, as described above, the RMD date will be increased from age 73 to age 75.
If you have any questions about these changes or how they will affect your plan(s), please contact our ERISA attorneys Cheryl L.M.T. Itagaki and Roger W. Fonseca. All plans have until the end of their 2025 plan years to incorporate the SECURE Act 2.0 changes (though you must follow the new rules as soon as they are effective).