How the SECURE 2.0 Act of 2022 Impacts Your Company’s Retirement Plan
The SECURE 2.0 Act of 2022 was signed into law at the end of 2022. While this Act covers various tax areas (such as conservation easements), there are also many significant changes for employee retirement benefit plans.
This new legislation builds on many of the provisions enacted under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which was designed to advance the access to and facilitate ease of the administration of qualified retirement plans.
It’s important to be aware of the effective dates of these provisions because while some provisions in the SECURE 2.0 Act will go into effect in the future, many provisions are effective immediately for certain plans. Some of the provisions are optional, while others are required.
Additional guidance is expected on many of the provisions, and it’s important to note that we are still waiting on guidance for some of the provisions enacted by the original SECURE Act of 2019.
All of these considerations and caveats mean it’s important that you contact your current plan provider or your employee benefit plan consultant to ensure that your organization is in compliance with the regulations that apply to you.
In the meantime, below are a few of the key highlights from the SECURE 2.0 Act and what these provisions mean for the organizations that will need to make changes to their retirement plans to comply with this new law.
SECURE 2.0 Act Provisions That Are Effective Upon Date of Enactment
Increased Credit for Retirement Plan Start-Up Costs (Optional for All Qualified Retirement Plans)
Employers with fewer than 100 employees were eligible for a three-year credit of up to 50% of the expenses associated with starting a plan, up to $5,000. The SECURE 2.0 Act increases the credit to up to 100% of qualified costs for employers with fewer than 50 employees.
RMD Age for Distributions Enacted After 12/31/2022 (Required for 401(a), 403(a), 403(b) and 457(b) plans)
The SECURE 2.0 Act raises the age for required distributions from age 72 to age 73 for individuals attaining age 72 after December 31, 2022. This change doesn’t affect individuals who attained age 72 before the effective date of enactment. Effective January 1, 2033, the required minimum distribution (RMD) age is 75.
Lowers Penalty for Failure to Take an RMD (Optional for All Plans)
Prior to enactment, the penalty for failing to take a required minimum distribution (RMD) was 50% of the RMD. The SECURE 2.0 Act reduces the penalty to 25%.
Removal of Barriers for Commercial Lifetime Annuities (Required for Defined Contribution 401(a), 403(a), 403(b) and 457(b) plans)
The SECURE 2.0 Act modifies the required distribution rules to eliminate barriers to the availability of certain common lifetime annuity features for commercial annuities issued in connection with an eligible retirement plan.
QBAD Recontribution Period (Optional for Any Applicable Eligible Retirement Plan That Accepts Rollovers)
The SECURE 2.0 Act sets a three-year window for recontributing Qualified Birth or Adoption Distributions (QBADs) occurring after the effective date. An individual has three years from the date of distribution to recontribute. QBADs that occurred before the effective date of legislation have until 1/1/2026 to make recontribution.
Matching and/or Nonelective Contributions May Be Roth (Optional for Defined Contribution Plans)
Employers may permit employees to elect all or some of their matching and/or non-elective contributions to be treated as Roth contributions. This does require contributions to be 100% vested.
Relief for Qualified Federally Declared Disasters (Optional for Defined Contribution Plans That Provide Distributions and Loans in Cases of Federally Declared Disasters)
Historically, Congress granted disaster relief on a case-by-case basis. Effective for disasters after January 26, 2021, the SECURE 2.0 Act creates statutory provisions for certain federally declared disasters. This allows distributions of up to $22,000 to be distributed from a retirement plan for affected individuals.
Relief for Overpayment to Retirees (Required for All Plans)
Prior to the SECURE 2.0 Act, plan sponsors were required to exhaust all means when a participant was mistakenly overpaid. If the amount was rolled over to another qualified plan or IRA, these amounts were subject to prohibited transactions because they weren’t eligible for rollover. Now, a plan sponsor may still choose to recoup these overpayments, but restrictions apply, and rollover overpayments will remain valid.
Self-Correction of Plan Errors (Optional for All Qualified Plans)
Within two years of enactment, the IRS is directed to revise Employee Plans Compliance Resolution System (EPCRS). Previously, the self-correction program under EPCRS was generally only available to specified short-term failures. The SECURE 2.0 Act expands the scope and type of inadvertent failures that are allowed to be self-corrected.
Early Distribution Penalty Exception (Required for All Qualified Plans)
Creates an exception to the 10% early withdrawal penalty for participants certified by a physician as being terminally ill.
Notice/Disclosure Reduction (Optional for Defined Contribution Plans)
Prior to the SECURE 2.0 Act, all eligible participants were required to receive numerous plan communications. Going forward, plan sponsors are only required to provide a Summary Plan Description in connection with initial eligibility and an annual notice of eligibility and enrollment deadlines.
Hardship Withdrawals (Optional for Defined Contribution Plans)
A hardship distribution may be permitted when a participant could show an immediate and heavy financial need or other emergency. Previously, plan sponsors were required to evaluate the existence of an eligible event. The SECURE 2.0 Act permits plan sponsors to rely on the participant’s own self certification that the participant indeed qualifies for a hardship distribution.
SECURE 2.0 Act Provisions That Are Effective for Plan Years after December 31, 2023
Retroactive Plan Amendments (Optional for All Qualified Plans)
The original SECURE Act of 2019 allowed for plan sponsors to retroactively adopt a plan up to the due date of the tax return (with extensions). The SECURE 2.0 Act expands on this premise and allows for plan sponsors to adopt discretionary amendments that increase participants’ benefits by the due date of the plan sponsor’s tax return.
Increased Involuntary Distribution Limit (Optional for All Qualified Plans)
The SECURE 2.0 Act increases the amount plan sponsors may force distribution from a participant’s retirement account into an IRA from $5,000 to $7,000.
Roth Catch-Up Contributions (Required for All Plans)
Currently, catch-up contributions can be made on a pre-tax or Roth basis. For plan years commencing in 2024, catch-up contributions are only available on a Roth basis for those employees whose compensation exceeds $145,000.
SECURE Act 2.0 Provision That Is Effective for Plan Years After December 31, 2024
Special Catch-Up Contributions (Optional for Plans That Allow Catch-Up Contributions)
Catch-up contributions increase to the greater of $10,000 or 50% more than the regular catch-up amount in 2025 for participants aged 60, 61, 62 and 63. These special catch-up contributions must be made on a Roth basis for those participants whose compensation is greater than $145,000.
Mandatory Auto Enrollment and Escalation Requirements (Required for 401(k) and 403(b) plans established after 12/31/2022)
Probably the most impactful change of the SECURE 2.0 Act is the mandatory auto enrollment and escalation requirements. Most new plans will be required to automatically enroll employees once they’re eligible at a minimum deferral rate and automatically increase their deferral rate each year until it reaches a minimum of 10%. Employees will still have the ability to opt out or select a different deferral rate. Even though this provision will not take effect until after December 31, 2024, we anticipate most newly created plans will automatically adopt this provision when created.
Evaluating the Impact of the SECURE 2.0 Act on Your Business’s Retirement Plan
What do these changes mean for your company’s retirement plan? Have you been contemplating offering a retirement plan but are unsure of where to start considering these changes?
