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SECURE 2.0 Act of 2022 Will Change Retirement Savings Plans

On December 29, 2022, President Joe Biden signed the SECURE 2.0 Act of 2022 (“SECURE 2.0” or Act) into law as part of the Consolidated Appropriations Act, 2023. SECURE 2.0 includes a wide range of changes which further expand retirement plan access as provided under the SECURE Act of 2019 (“Secure 1.0”). The Act includes almost 100 various provisions, some of which are in immediate effect and others that will take effect in 2024 and beyond. Below is a summary of some of the key provisions which may be of interest to employers.

Optional Roth Treatment of Employer Contributions

Effective immediately, employers may amend their 401(a), 403(b), and governmental 457(b) plans to permit employees to elect that employer matching (including matching contributions on qualified student loan payments) and non-elective contributions be made post-tax, as long as they are 100 percent vested when contributed to the plan. Under prior law, employer contributions are made to retirement plans on a pre-tax basis, and taxes are paid on the contributions and any attributable earnings at the time of distribution.

While this provision took immediate effect and this change is technically available to add to plans now, plan sponsors may wish to wait for additional guidance regarding implementation and process. Additionally, payroll systems will need to be updated to facilitate these contributions.

Facilitation of Error Corrections

Effective immediately, the Act expands the self-correction system known as the Employee Plans Compliance Resolution System (“EPCRS”) to allow more types of errors to be corrected internally and to exempt certain failures to make required minimum distributions from the excise tax. There are also new rules for correcting overpayments.

Catch-Up Contributions Increased

Currently participants aged 50 and older can contribute an extra $7,500 per year annually into their 401(k) account. This amount will increase to $10,000 per year (indexed for inflation) starting in 2025 for participants aged 60 to 63. In addition, after 2023, all catch-up contributions for participants earning over $145,000 annually contributions must be made on a post-tax basis.

Increased Credit for Retirement Plan Administrative Costs

Effective for taxable years beginning after December 31, 2022, employers with less than 100 employees may be eligible for a three-year start-up tax credit of up to 50 percent of administrative costs, with an annual limit of $5,000. SECURE 2.0 increases this credit to 100 percent of qualified start-up costs for employers with up to 50 employees. An additional credit of up to $1,000 per employee for eligible employer contributions may apply to employers with up to 50 employees but phases out from 51 to 100 employees.

Required Minimum Distributions (RMDs)

The requirement to begin taking RMDs will increase from age 72 to age 73 in 2023, and then to age 75 in 2033. In addition, SECURE 2.0 would reduce, and sometimes, eliminate altogether, the excise tax imposed on failing to take RMDs.

Small Incentives for Participation

Currently, employers can only provide matching contributions as an incentive to participate in a retirement savings plan. Effective for plan years beginning after 2022, employers may offer de minimis financial incentives, such as low-dollar value gift cards, to boost participation in retirement plans. However, the financial incentives cannot be purchased with plan assets.

Matching Contributions for Student Loan Payments

In 2024, effective for plan years beginning after December 31, 2023, employers could match student loan repayments as if the student loan repayments were deferrals. Employers will be able to make contributions to their company retirement plan on behalf of employees who are paying student loans instead of saving for retirement. Employers may rely on the employee to certify annually as to the amount of their qualifying student loan payments.

Emergency Savings Accounts

In 2024, if permitted by the terms of a plan, non-highly compensated employees could contribute up to the lesser of three percent of compensation or $2,500 on a post-tax basis to an emergency savings account under the plan. Contributions are capped at $2,500, but once the cap is reached, additional contributions can be directed to the employee’s Roth defined contribution plan (if they have one) or stopped until the balance falls below the limit.

Employers may automatically enroll employees into these accounts at no more than three percent of eligible wages, but employees can opt-out.

Withdrawals for Certain Emergency Expenses

In 2024, the Act contains provisions for an exception for certain distributions for emergency expenses, which are generally unforeseen immediate financial needs relating to personal or family emergency expenses and does not require a special account. Only one distribution is permissible per year of up to $1,000, and a taxpayer has the option to repay the distribution within three years. No further emergency distributions may be made during the three-year repayment period until any amounts previously taken are repaid. The employer may rely on an employee’s written certification that the employee is facing a qualifying emergency personal expense, absent actual knowledge to the contrary. Further guidance is expected on this provision. SECURE 2.0 would also permit penalty-free withdrawals of small amounts for participants who need the funds in cases of domestic abuse or terminal illness.

Expanded Eligibility for Long-Term, Part-Time Employees

Under current law, employees with at least 1,000 hours of service in a 12-month period or 500 hours of service in a three consecutive year period must be eligible to participate in the employer’s qualified retirement plan. This provision would reduce the three-year rule to two years, for plan years beginning after December 31, 2024. This provision does not apply to employees who are covered under a collective bargaining agreement (CBA) or to non-US residents.

Automatic Enrollment

In 2025, employers who start new retirement plans after December 29, 2022, will be required to automatically enroll employees in their retirement plan with a contribution rate of at least three percent, but not more than 10 percent of eligible wages. Employees may opt out. Those who have been in business for less than three years and employers who have 10 or fewer workers are exempt from this provision.

Automatic Contribution Increases

In 2025, for new retirement plans started after December 29, 2022, contribution percentages must automatically increase by one percent on the first day of each plan year following completion of a year of service until the contribution is at least 10 percent, but no more than 15 percent of eligible wages. Those who have been in business for less than three years, employers who have 10 or fewer workers or governmental and church plans are exempt from this provision.

Lost and Found Database

SECURE 2.0 would create a national online searchable database to enable employers to locate “missing” plan participants, and plan participants to locate retirement funds. Beginning in 2025, plans will be required to share information with the Department of Labor to be included in the database.

Saver’s Match

In 2027, lower-income employees will be eligible to receive a federal matching contribution of up to $2,000 per year that would be deposited into their retirement savings account. The matching contribution is 50 percent of the employee’s contributions but is phased out as income increases. This match replaces the current Saver’s Credit which can currently be claimed on the employee’s personal income tax filing.

Next Steps for Employers

Given the numerous provisions attached to SECURE 2.0, it is strongly recommended that employers work closely with their retirement plan professionals, in addition to their employee benefits counsel to determine which changes may be relevant to their circumstances. Plan administrators will need to ensure their plans are being operated in compliance with applicable SECURE 2.0 provisions as of the various provision effective dates.

Employers should be mindful that some provisions may require amendments to existing retirement plans and offerings many of which must be adopted on or before the last day of the first plan year beginning on or after January 1, 2025 (January 1, 2027, for governmental and applicable collectively bargained plans).

Employers should also be aware that they may still have compliance obligations and plan adoption options under SECURE 1.0, and that SECURE 2.0 will further expand those obligations and plan options. For information on some of the key provisions of SECURE 1.0, refer to this prior post from HR Works.

HR Works, headquartered in Upstate New York, is a human resource management outsourcing and consulting firm serving clients throughout the United States for over thirty years. HR Works provides scalable strategic human resource management and consulting services, including: affirmative action programs; benefits administration outsourcing; HRIS self-service technology; full-time, part-time and interim on-site HR managers; HR audits; legally reviewed employee handbooks and supervisor manuals; talent management and recruiting services; and training of managers and HR professionals.