Major Retirement Plan Changes

While we were in holiday food comas or football-induced vegetative states, the President signed the Consolidations Appropriations Act on December 29, 2022. The Act did not include any significant tax provisions or extenders, but it did include the long-awaited Secure 2.0.

Secure 2.0 builds upon the original SECURE Act from 2019 with the goal of further ensuring that more Americans can save for retirement. It expands automatic enrollment programs, enhances credits, improves investment options for plan participants and changes RMDs. Much of the Secure 2.0 Act is related to plan administration. Here’s a brief rundown of some of the key tax-related provisions and when they will become effective.

Note: The Secure Act 2.0 is over 400 pages, and it is anticipated that further regulations will be issued to better assist plan sponsors, administrators and participants in understanding the various technical and significant charges.

  • Automatic Enrollment – Effective for plan years after 2023, 401(k) and 403(b) plans must automatically enroll employees once they become eligible. The amount enrolled can not be less than 3% of the salary and not more than 10%. This percentage increases by 1% each year up to 10% max. Employees will be permitted to opt-out. Exceptions are provided for businesses with 10 or fewer employees, companies in existence for less than three years, church and government plans. All current 401(k) and 403(b) plans are grandfathered.
  • Saver’s Credit – A tax break for individuals and families who make retirement contributions to traditional or Roth IRAs, 401(k)s or other qualified retirement plans. Previously, the saver’s credit was only available to individuals who made contributions up to $2,000 or married couples who contributed up to $4,000 in a given year. Under the Secure Act 2.0, these limits have been doubled to $4,000 for individuals and $8,000 for married couples. The Secure Act 2.0 also expands eligibility for the saver’s credit by removing the income limits previously in place. This means that more people will be able to take advantage of the tax break, even if they don’t make a lot of money.
  • Catch-up Limits – The Act will increase the 401(k) plan catch-up contribution limits to the greater of $10,000 or 150% of the regular catch-up amount for individuals age 60 through 63. The increased amounts will be indexed for inflation after 2025. This provision will take effect for taxable years beginning after December 31, 2024.

Note: The Act requires, starting in 2024, that all catch-up contributions for workers with wages over $145,000 the previous year are to be deposited into a Roth (i.e., after-tax account). The wage cap will be adjusted for inflation.

  • Small Employer Tax Credit – It is expanded from 50% of start-up costs paid by the employer for the first three years to 100% over five years for employers with 50 or fewer employees (prorated for employers over 50). It also clarifies that small businesses joining a multiple employer plan (MEP) are eligible for the credit. The tax credit offering provides a strong incentive for employers by limiting the administrative burdens associated with establishing and managing employee retirement offerings.
  • Required Minimum Distributions – Employer-sponsored qualified retirement plans, traditional IRAs and individual retirement annuities are subject to RMD rules. They require that benefits be distributed, or start being distributed by the required beginning date. Under the new law, the required age used to determine distributions increases from age 72 to age 73 beginning on January 1, 2023. It will then increase to age 75 starting on January 1, 2033.
  • Emergency Withdrawals – SECURE 2.0 makes permanent the 10% early withdrawal exclusion due to a federally declared disaster if made within 180 days of the disaster, live within the disaster area and have experienced economic hardship.
  • Student Loan Contributions – Beginning in 2024, the new law will allow employers to provide employees with 401(k) contribution matches based on their workers’ student loan payments. In other words, student loan payments can be treated as elective deferrals or employee 401(k) contributions and, therefore, applicable to a company’s matching policies. The result of this provision is that employees who can’t afford to save money for retirement because they’re repaying student loan debt can still receive matching contributions from their employers into retirement plans.
  • 529 Plans – After 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. The rollover is treated as a contribution towards the annual Roth IRA contribution limit. Begins in 2024.
  • Employer Matching: The Act allows employer matches for 401(k) 403(b) or 457(b) to be Roth or Pre-Tax. Currently, matching is only pre-tax. This optional treatment is available for contributions made after December 29, 2022.
  • SIMPLE and SEP Roth IRAs – The Act repealed Sec. 408A(f), so now SIMPLE IRAs and SEPs can allow employees to treat contributions as nondeductible Roth contributions. This change is effective for tax years beginning after December 31, 2022.
  • Other Tax Provisions
    • Military Spouse Tax Credit – The Act establishes a tax credit for employers with up to 100 employees who make military spouses eligible for their retirement plans within two months of their hiring date. This ensures that each military spouse is 100% vested in all employer contributions and that every military spouse is eligible for any matching or nonelective contribution they otherwise would only have qualified for at two years of service. The tax credit equals $200 per military spouse plus $300 in employer contributions per individual for up to three years.
    • Charitable Conservation Easements – Charitable deductions for qualified conservation contributions are disallowed if the value of the easement exceeds 250% of the principal’s basis.
    • Telehealth Extension – Employers will have the option to provide pre-deductible coverage of telehealth services for people with high-deductible health plans for another two years.

Overall, the Secure Act 2.0 provides a number of significant tax and retirement benefits to Americans. Contact an Adams Brown advisor if you have any questions about your situation.