Author: Paul A. Carl, CHSA, CPFA®, Vice President, Retirement Plan Consulting, HORAN Wealth Management
The Federal Budget Bill signed by President Biden on December 29, 2022 included game-changing retirement legislation. Popularly known as SECURE 2.0, this bi-partisan legislation builds on a foundation originating from 2019's Setting Every Community Up for Retirement Enhancement (SECURE) Act. SECURE 2.0 contains 92 provisions, some of which are effective immediately and most of which will take effect over the next several years.
Most, if not all, of the provisions are designed to address the retirement savings crisis that is unfolding. In August 2022, Bloomberg reported on a Boston College study that estimated a $7.1 trillion retirement-savings shortfall existed among American households. More recently, Schwab reported that a thousand workers think they need an average of $1.7 million in savings to pay for retirement.
Overall, SECURE 2.0 appears to take a monumental step in the right direction to help. With 92 provisions, every employer should expect to be affected by SECURE 2.0 in some way. The following areas are a few important examples.
Any employer with 10 or more employees who adopted a new 401(k) or 403(b) AFTER December 29, 2022, must automatically enroll participants at between 3% and 10% increase that rate by 1% per year to a maximum of at least 10% but not more than 15%. The effective date to institute these provisions is the plan year beginning on or after 1/1/2025. While some employers struggle with requiring employees to save for retirement, statistically, plans with auto-enrollment and auto-escalation features generally have greater active participation that boosts retirement savings balances. While SECURE 2.0 takes that decision away from future plan sponsors, existing plan sponsors may want to re-evaluate their previous decisions around auto-enrollment and auto-escalation.
The original SECURE Act addressed the retirement plan participation of long-term part-time workers ("LTPT") by requiring employers to include the LTPT who worked over 500 hours in three consecutive years as plan participants. The effective date for this change was and remains 20224. SECURE 2.0 shortens the 500 hour/three-year rule to two years, effective 2025. So which rule applies? They both do. The three-year rule applies for the 2024 plan year and the two-year rule applies beginning with the 2025 plan year.
Currently, employers can designs plans to cause a cash-out distribution to a terminated participant if the vested account balance is $1,000 or less and force a rollover to an IRA if the vested account balance is less than $5,000. SECURE 2.0 increases the $5,000 to $7,000, effective for plan years beginning in 2024.
Speaking of distributions, SECURE 2.0 changes several rules around the required minimum distribution (RMD). The RMD affects both retirement plan participants and IRA holders. The original SECURE Act moved the RMD age from 70-1/2 to 72. SECURE 2.0 moves the RMD age to 73, immediately effective in 2023, and to age 75 in 2033. Failure to take a RMD timely has often resulted in the affected individual paying an excise tax equal to 50% of the RMD amount. SECURE 2.0 reduces the penalty to 25% of the RMD amount. SECURE 2.0 also removes the RMD requirement from certain life annuities. Beginning in 2024, surviving spouses can elect to be treated as the deceased employee for the purposes of the RMD. Also effective for the plan years beginning in 2024, the RMD is no longer required to be taken from ROTH accounts in retirement plans; this change results in similar treatment of retirement plan ROTH accounts as compared to ROTH IRAs.
All too often an employer loses track of a former employee. When that former employee is a participant in the employer's retirement plan and that former employee does not elect to take a distribution, the employer is faced with a fiduciary responsibility to do its best to locate that former employee. SECURE 2.0 requires the Department of Labor to create a database within two years that will allow a participant or beneficiary to search for plan administrator contact information. Employers should expect that, starting in 2025, the DOL will be requiring certain information be shared with them regarding this provision.
Mounting student loan debt has been identified as a financial concern for several years. Nerd Wallet's analysis published in January 2022 based upon U.S. Census information indicated that 45 million Americans have student loan debt and most likely age group to have student loan debt were those individuals ages 25-to-34. In May 2022, The Washington Post reported that 67% of student loan debt belonged to those under age 40. SECURE 2.0 addresses the potential lack of retirement savings of student loan debt holders by allowing employers to match student loan payments as if those payments were elective deferral contributions. Employers will be permitted to rely on employee certification of the loan payments. This provision can take effect in plan years beginning in 2024.
For 2023, participants age 50 or older at anytime during the year can defer an extra $7,500 as a catch-up contribution. Beginning with 2025 plan year, the catch-up contribution for participants age 60 to 63 will be the greater of $10,000 or 150% of the regular catch-up limit in 2024. Also, for participants who earn more than $145,000 annually, the catch-up contributions must be made on a ROTH (after-tax) basis; this feature becomes effective after 2023.
Speaking of ROTH, effective immediately, plan sponsors may amend their plans to permit employees to elect the employer matching contribution to be made as ROTH contributions, provided the match is 100% vested when contributed to the plan.
Finally, SECURE 2.0 addressed some relief related to Top Heavy rules. A plan is considered "top heavy" when more than 60% of the benefits are attributable to "key" employees. Ask any employer who has had a top heavy plan, they can be expensive. Employers must, at a minimum, either contribute 3% of compensation to non-key employees who are participants or limit the amount of contributions that key employees can make to their retirement plan, often limiting each to 0% deferral. SECURE 2.0 permits plan sponsors to exclude employees who do not meet the statutory age and service requirements (Age 21 and 1-year-of-service) from inclusion in the top heavy test. This could improve top heavy results.
These examples highlight some of SECURE 2.0's provisions impacting retirement plans. Stay tuned for additional updates, especially as governing regulatory bodies embark on rules, regulations, and clarifications around each of the 92 SECURE 2.0 provisions.
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