Secure 2.0 Act Makes Extensive Changes to Retirement PlansMay 1, 2023
On December 29, 2022, President Biden signed into law the Secure 2.0 Act of 2022 as part of the Consolidated Appropriations Act of 2023 (collectively, the “Act”). The Act contains numerous changes to laws governing retirement plans, some of which are summarized below. Plan amendments implementing the applicable requirements of the Act are not required immediately. Instead, except for governmental plans and collectively bargained plans, all amendments to retirement plans based on the Act must be adopted by the last day of the first plan year beginning on or after January 1, 2025 (this date is December 31, 2025 for calendar year plans). For governmental plans and collectively bargained plans, the deadline to amend is the last day of the first plan year beginning on or after January 1, 2027 (December 31, 2027 for calendar year plans).
Any new 401(k) or 403(b) plan established on or after December 29, 2022, must include automatic enrollment and automatic escalation features as part of the plan documents, which features must be effective for plan years beginning after December 31, 2024. Specifically, such plans must include a provision that automatically enrolls employees in the plan at a default rate between 3% and 10% of compensation (which the employee may opt out of or increase). In addition, the plans must provide that contribution percentages will automatically increase by 1% each year until the employee’s contribution percentage is at least 10%, but no more than 15%. Exceptions to these general rules apply to new businesses that have been in existence for less than three years, small businesses employing no more than 10 employees, governmental plans, and church plans.
Eligibility of Part-time Employees After Two Years of Employment
The SECURE Act of 2019 required that 401(k) plans must permit participation by an employee who worked at least 500 hours (but less than 1,000 hours) per year for three consecutive years. This change was effective for plan years beginning after December 31, 2020. Now, under the Act, 401(k) plans must be amended to permit participation by an employee who worked at least 500 hours for two consecutive years. This change under the Act is effective for 401(k) plan years beginning after December 31, 2024.
Financial Incentive for Plan Participation
Participants may now receive de minimis financial incentives from their employer (not paid for with plan assets) for contributing to a 401(k) or 403(b) plan for plan years beginning after December 29, 2022.
Matching Contributions for Student Loan Payments
Effective for plan years beginning after December 31, 2023, 401(k), 403(b) and 457(b) plans may be amended to allow plan sponsors to make matching contributions to employees based on certain “qualified student loan payments.” The student loan repayments are not taken into account as contributions by the employee under the plan. If a plan sponsor desires to make these matching contributions, the plan must be amended to allow them.
Employer Contributions as Roth Contribution
Prior to the Act, employer matching contributions could not be made as Roth contributions. The Act changed that rule and now 401(k), 403(b) and governmental 457(b) plans may be amended to allow employees to choose whether a matching or non-elective employer contribution is a Roth contribution. These employer contributions made as Roth contributions will be made on an after-tax basis. If a plan sponsor would like to give employees this contribution option, a plan amendment would need to be executed.
403(b) Hardship Withdrawal Rules
Effective for plan years beginning after December 31, 2023, the Act aligns the 403(b) hardship withdrawal rules with the 401(k) hardship withdrawal rules. As a result, 403(b) plans may be amended in order to allow employees to take a hardship withdrawal. In order for a 403(b) plan to allow an employee to take a hardship withdrawal, the plan would need to be amended. In addition, effective for plan years beginning after December 31, 2023, employees are not required to take available loans before taking a hardship distribution from a 403(b) plan. Plans which currently require an employee to take an available loan before a hardship distribution would need to be amended.
Catch-Up Contribution Limits
Beginning for taxable years after December 31, 2024, catch-up contribution limits for individuals age 60-63 are increased to the greater of $10,000 (indexed for inflation) or 50% more than the regular catch-up amount in effect for 2024. Plans that include a catch-up contribution provision and want to increase the catch-up contribution limit must execute a plan amendment to do so.
Catch-Up Contributions as Roth Contributions
Currently, catch-up contributions can be made on a pre-tax or Roth basis to 401(k), 403(b), and governmental 457(b) plans for individuals age 50 or older. Effective for tax years beginning after 2023, catch-up contributions by employees whose wages exceed $145,000 (as indexed) are required to be made as Roth contributions. This Roth treatment of catch-up contributions is mandatory for a plan that makes catch-up contributions available and would require an amendment to such a plan.
Increase in Age for Required Minimum Distribution
Under the original Secure Act of 2019, the age that participant required minimum distributions needed to start was raised from age 70.5 to age 72. The Act increases the required minimum distribution age further to 73 starting on January 1, 2023 and age 75 starting on January 1, 2033. The provision is effective for distributions made after December 31, 2022, for individuals who turn 72 after that date. For those plans which do not require distributions to be made until required under Code Section 401(a)(9), a plan amendment must be executed to include this change to the required minimum distribution age.
Penalty Free Distributions For Certain Emergency Expenses
Effective for distributions taken after December 31, 2023, a qualified retirement plan may be amended to allow a participant to take one emergency personal expense distribution of up to $1,000 per year and not pay the 10% penalty tax on early distributions. The distribution may be repaid within three years. Within this three-year period, additional emergency distributions cannot be made unless the participant fully repays the amount previously distributed or the total contributions to the plan (elective deferrals and employee contributions) during the three-year repayment period exceed the amount of the original emergency distribution. In order for a participant to take an emergency personal expense distribution, the plan would need to be amended to allow for it.
Penalty Free Distributions For Domestic Abuse Victims
Effective for distributions made after December 31, 2023, 401(k), 403(b), and governmental 457(b) plans may be amended to allow a participant who is a domestic abuse victim to take a distribution equal to the lesser of $10,000 as indexed for inflation or 50% of the participant’s account without being subject to the 10% tax on early distributions. Participants may self-certify eligibility and withdrawals may be repaid over a period of three years.
Penalty Free Distributions for Long-Term Care Insurance and Terminally Ill Persons
Effective for distributions made after December 29, 2025, 401(k), 403(b), and governmental 457(b) plans may be amended to allow participants to take a penalty-free distribution of up to $2,500 per year for long-term care insurance.
The Act also provides that plans may be amended to allow for a waiver of the 10% additional tax for distributions to a terminally ill participant, effective for distributions made after December 29, 2022.
Self-Certification for Hardship Distributions
Effective for plan years beginning after December 29, 2022, 401(k), 403(b), and governmental 457(b) plans will be permitted to rely on participants self-certifying in writing that they have a safe harbor event to take a hardship distribution. Previously, plans could rely on a participant’s self-certification of the amount necessary to address a hardship but not an employee’s certification of the existence of the hardship itself.
Cash-Out Threshold Increases
A qualified retirement plan may now establish the upper limit for mandatory cash-outs to $7,000 for distributions made after December 31, 2023. The previous upper limit for mandatory cash-outs was $5,000. A plan amendment would be required to increase the upper limit mandatory cash-out to $7,000.
Federally Declared Disaster Distributions and Loans
The Act provides that $22,000 per year may now be distributed from an individual’s retirement plan or IRA for individuals affected by a federally declared disaster occurring on or after January 26, 2021. The distribution is not subject to the 10% additional tax and may be repaid during the three-year period beginning after the date of the distribution. Amounts that are distributed before the disaster to purchase a home can also be recontributed. In addition, plans may provide larger loan amounts for affected individuals and permit additional time for repaying plan loans by affected individuals. A plan amendment would be required to allow for this distribution.
Repayment of Qualified Birth or Adoption Distributions
The Act requires distributions for qualified birth or adoption to be recontributed within three years to qualify as a rollover distribution. Before the Act there was no time period set for when these distributions must be recontributed. A plan amendment specifying this three year time line is required for plans that allow for a qualified birth or adoption distribution to be taken. This provision is effective for distributions made after December 29, 2022.
Elimination of Pre-Death Required Minimum Distributions for Roth Amounts
Under the previous law, required minimum distributions were not required to begin prior to the death of the owner of a Roth IRA. However, pre-death distributions were required in the case of the owner of a Roth designated account in an 401(k) or other retirement plan. Effective for taxable years beginning after December 31, 2023, pre-death required minimum distributions are not required for Roth amounts held in an 401(k) or other retirement plan.
Small Employer Tax Credit Increase
Under current law, for employers with less than 100 employees that adopt a new retirement plan, there is a credit of 50% of start-up costs of the plan with a cap of $500 to $5,000, depending on the size of the employer, for up to three years. Effective for taxable years after December 31, 2022, the Act increases the percentage from 50% to 100% for employers with 50 or fewer employees.
If you have questions about the Secure 2.0 Act of 2022 and how it may impact your business's retirement plan, please contact an attorney from Lewis Rice's pension & employee benefits group.