SECURE 2.0: What you need to know

What is the SECURE 2.0 Act of 2022?

SECURE 2.0 expands and increases retirement savings through various changes in access, contribution limits, enrollment, and more. The changes are aimed to help low-income households, part-time employees, new small businesses and employees closer to retirement age. SECURE 2.0 should eliminate some of the complex and confusing retirement plan rules currently in place.

Key Changes in SECURE 2.0

Mandatory Automatic Enrollment
Starting in 2025, employers that provide newly created 401(k) and 403(b) plans will have to auto-enroll their employees. Instead of an opt-in approach to enrollment, employees will need to be enrolled automatically in employer-sponsored plans when the new mandate takes effect. The initial contribution rate is between 3% and 10%, increasing by 1% each year, to a maximum of at least 10%, but no more than 15% of compensation.    

Improved start-up credit
Effective January 1, 2023 the small business startup credit covers 100% (up from 50%) of administrative expenses up to $5,000 for the first three years of a plan established by employers with up to 50 employees.

Increased catch-up limits
In 2025, under SECURE 2.0, the retirement plan “catch-up” contribution limit will be raised to $10,000 for participants aged 60 to 63. For 2023, the catch-up contribution amount is limited to $7,500 for most retirement plans and is subject to inflation increases.  

Long-term, part-time workers qualify in two years
Under current law, employees with 500 work hours in a consecutive three-year period must be allowed to participate in an employer’s qualified retirement plan. Starting January 1, 2025 the three-year rule is reduced to two years.

Participant disclosure simplification
Effective for plan years starting after December 31, 2022, no notices will be required to unenrolled participants. An annual notice must be provided of the right to join and key benefits of the plan.

Increase in cash-out limit
SECURE 2.0 increases the permissible non-consent cash-out limit for distributions made after December 31, 2023 from $5,000 to $7,000.

Increased age for Required Minimum Distributions (RMDs)
The age for RMDs will increase to 73, starting January 1, 2023, and to 75 starting on January 1, 2033, for certain individuals. In addition, the RMD excise tax is reduced from 50% to 25%.

403(b) multiple plans and plan changes
SECURE 2.0 makes a number of changes to 403(b) plans aimed at standardizing them with 401(k) plans to give 403(b) plan sponsors and participants broader retirement saving options. 403(b) plans will now be allowed to participate in Multiple Employer and Pooled Employer Plans. Other changes to collective investment trusts, auto-Enrollment and auto-Escalation,  ‘De minimis’ incentives, and standardization of hardship withdrawal rules will also go into effect.

Catch-up contributions in form of Roth
Effective for taxable years beginning after December 31, 2023, all qualified plan catch-up contributions for individuals with FICA wages in excess of $145,000 (indexed) for the prior year must be made in the form of Roth contributions. Plans will be required to have a Roth source if they wish to allow catch-up contributions.

Certain employer contributions as Roth
Upon enactment, SECURE 2.0 permits qualified, 403(b) and governmental 457(b) plans to allow employees to designate their employer matching or nonelective contributions as Roth contributions, including student loan matching contributions.

Additional Changes in SECURE 2.0

Penalty-free emergency withdrawals
In cases of  “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses” a penalty-free withdrawal of up to $1,000 will be allowed every three years, or one per year if the distribution is repaid within three years. Smaller emergency withdrawals will be penalty-free for funds needed in cases of domestic abuse or terminal illness.

Special match for those paying student loans
Beginning in 2024, employers will be allowed to make a special kind of matching contribution for employees paying student loans. Whatever amount the worker is spending on their loans, the employer will match a percentage of that amount for their retirement plan. The law applies to 401(k), 403(b), SIMPLE IRA and 457(b) plans.

Searchable Database to locate missing participants
SECURE 2.0 will create a national online database for employers to locate plan participants who they can no longer contact. Plan participants themselves  to locate retirement funds.  

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Download our SECURE 2.0 Cheat Sheet and our Tax Enhancements for Start-ups to learn more!

In Conclusion:

More savings opportunities for those who struggle to save

In the end, this legislation aims to help those who are currently struggling the most to save for retirement. The individuals most likely to benefit from these changes will be older savers, part-time workers, low-income households, and savers who are saddled with student loan debt.

We can help employers and advisors navigate Secure 2.0 and what it means for them and their employees. Reach out to our team today!
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This information is provided as general guidance and may be affected by changes in law or regulation. It is not intended as accounting or legal advice. If you have questions please reach out to our team.

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