On Dec. 29, 2022, President Biden signed the long-awaited SECURE Act 2.0 into law.
The SECURE Act 2.0 was just a small portion of a much larger omnibus appropriations bill titled the Consolidated Appropriations Act, 2023.
As a follow-up to its predecessor—the Setting Every Community Up for Retirement Enhancement (SECURE) Act—the SECURE Act 2.0’s goal is to continue to expand retirement coverage and increase retirement savings for American workers. Below are some of its most noteworthy provisions.
Increases the RMD age
The SECURE Act 2.0 raised the age at which taxpayers are required to take distributions from their retirement accounts. Required minimum distributions (RMDs) are mandatory for the following taxpayers at the following ages:
- Taxpayers who turn age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2033, must begin taking distributions at age 73 (up from age 72).
- Taxpayers who turn age 74 after Dec. 31, 2032, must begin taking distributions at age 75 (up from age 73).
Mazars’ insight: Some find the language used in the Act confusing, but simply put: The required age for RMDs was 70 ½ for over 30 years until SECURE 1.0 moved it to age 72. If you were 72 before Jan. 1, 2023, you should have already begun taking distributions and must continue. As of Jan. 1, 2023, the age changed to 73. If you were not previously required to take distributions and you reach age 73 in any year from 2023 through 2032, you must begin in the year you will turn age 73 and continue thereafter.
As of Jan. 1, 2033, the age will change again to 75. If you were not previously required to take distributions (you hadn’t reached age 73 by Dec. 31, 2032), you must begin in the year you will turn 75 and continue thereafter. There is apparently an error in the text of the law related to those individuals who turn age 73 in 2032. The current language literally read, would indicate that those turning age 73 during 2032 (“before January 1, 2033”) must begin RMDs in 2032 but the language changing what is now referred to as the “applicable age” to 75, (“those turning 74 after December 31, 2032”) includes those same people who turned 73 in 2032.
A technical correction will have to clear up whether those people born in 1959 must begin taking distributions in 2032 when they reach age 73 (probably intended) or when they reach age 75 in 2034. Other than what is now referred to as the “applicable age”, most of the other rules surrounding RMDs for individuals, remain the same.
Reduces the penalty for failure to take RMDs
Taxpayers who fail to take RMDs from their retirement accounts are required to pay an excise tax penalty. Effective for the 2023 tax year, the excise tax penalty dropped from 50% of the shortfall to only 25% of the shortfall, or down to 10% if taxpayers correct their shortfall within a two-year window if the IRS has not already mailed a notice of deficiency or already assessed the excise tax.
Mazars’ insight: Prior to SECURE 2.0, when the penalty was 50%, the IRS was lenient regarding requests for waiver of the excise tax if the error was corrected and Form 5329 was filed with a letter of explanation. It remains to be seen whether the IRS will continue to be as lenient.
Raises the catch-up contribution limit
The SECURE Act 2.0 raised the dollar amount of excess contributions certain older taxpayers can make to their retirement accounts beyond the statutory or plan-imposed limits normally allowed for those age 50 or older. Beginning in 2025, taxpayers aged 60, 61, 62 and 63 can make the following catch-up contributions:
- Participants in retirement plans, including those under code sections 401(k), 403(b) and 457(b), can contribute up to the greater of (1) $10,000 or (2) 50% more than the regular catch-up amount in 2024 (adjusted for inflation commencing in 2026). The regular catch-up for these plans is $7,500 for 2023.
- Participants in SIMPLE plans can contribute up to the greater of (1) $5,000 or (2) 50% more than the regular catch-up amount in 2025 (adjusted for inflation commencing in 2026). The regular catch-up for these plans is $3,500 in 2023.
Mazars’ insight: This language seems unnecessarily complicated. 150% of the 2023 regular catch-up amount of $7,500 for most retirement plans would already be $11,250 and unless the U.S. experiences a materially deflationary environment, will always be greater than the $10,000 limit even after considering inflation indexing. The same math applies to SIMPLE plans. For those contributing to IRAs, the catch up will no longer remain fixed at $1,000. It will now be indexed for inflation like most other retirement plan limits.
Requires certain catch-up contributions to be made on a Roth basis
Beginning in 2024, catch-up contributions to 401(k), 403(b) and 457(b) plans must be treated as Roth contributions (may not be made on a pretax basis and therefore taxed currently) if the participant’s prior-year wages exceed $145,000 (adjusted for inflation). This applies even to plans that had not previously offered participants the opportunity to make Roth contributions.
Mazars’ insight: Most if not all plans will provide ROTH options due to this provision, even if they previously made conscious decisions not to. Interestingly, the language indicates that mandatory ROTH treatment for catch-up contributions only applies if “wages for the preceding calendar year from the employer sponsoring the plan exceed $145,000.”
This seems to leave flexibility for those treated as self-employed (no wages) to continue making their catch-up contributions on a pretax basis and for new hires to do so as well, regardless of their income. New hires do not have any wages "in the prior year from the employer sponsoring the plan.”
Allows employer matches and nonelective contributions to be Roth contributions
The SECURE Act 2.0 now allows participants in 401(a), 403(b) or 457(b) plans to designate some or all employer matching contributions and/or non-elective contributions as Roth contributions, as long as participants are fully vested in those contributions.
Mazars’ insight: Though this option is permitted immediately (upon enactment), it will take time to ready plans for implementation. Previously, matching and nonelective employer contributions were not permitted to be made on a Roth basis.
Expands automated enrollment
Beginning in 2025, all new 401(k) and 403(b) plans must include an automatic enrollment feature, where new participants will be enrolled to contribute between 3% and 10% of pay into the retirement plan unless they opt out.
These plans must also have an escalation feature, where contributions automatically escalate by 1% per year until the total contribution reaches at least 10% and up to 15% (10% maximum until 2025) of pay, unless employees opt out. Employees must be allowed 90 days to elect permissible withdrawals of deferrals resulting from automatic enrollment.
Automatic enrollment is not required for plans established before Dec. 29, 2022; SIMPLE plans; plans with less than 10 employees until the year after they reach 10 employees; plans sponsored by employers in existence for less than three years; and certain governmental or church plans.
Improves plan access for part-time workers
The 2019 SECURE Act mandated that part-time employees who reached age 21 and worked at least 500 hours per year in the prior three consecutive years since 2021 be permitted to participate in a 401(k) plan by 2024. SECURE 2.0 shortens the three-year period to two years as of 2025.
Mazars’ insight: In 2024, the three-year rule will still be applicable for those who worked at least 500 hours in 2021, 2022 and 2023, but by 2025 employees with only two consecutive years of at least 500 hours will be eligible. Allowing part-time employees will still not require employer discretionary contributions and matching contributions and will not affect typical discrimination testing.
Allows a surviving spouse to be treated as an employee for RMD purposes
A spouse designated as beneficiary can elect to be treated as the employee, adding another potentially more favorable distribution option to those available exclusively to spouses. Note that for purposes of this, and many other RMD rules, the term “employee” includes both an employee in an employer retirement plan and a participant in an IRA.
Beginning in 2024, if the employee passes away before RMDs have begun, their surviving spouse can elect to be treated as if they were the employee for purposes of RMDs. This allows the surviving spouse to begin taking their deceased spouse’s RMDs no earlier than their spouse would have taken them, potentially delaying RMDs for years, and getting to use the more favorable uniform table to calculate the distributions.
Mazars insight: This change avoids the need for a spouse to roll over to their own IRA in order to use the lifetime table. It also benefits beneficiaries who are older than their spouses. Treating themselves as the employee would delay distributions until the younger employee would have reached the applicable age.
Other noteworthy provisions
- Student loans as matching contributions
To help employees who must choose to pay student debt over saving for retirement, beginning in 2024, the SECURE Act 2.0 permits employers to make matching contributions to the retirement plan by treating qualified student loan payments as retirement plan deferrals.
- Credit for small employer pension plan start-up costs
Beginning in 2023, employers with 50 or fewer employees can claim a credit equal to 100% of the qualified start-up costs of a new pension plan, up from 50%. Employers with between 51 and 100 employees are still eligible for a 50% credit. The credit is available for the first three years of the plan’s existence and can now be increased based on employer contributions. The additional credit is up to $1,000 per employee for those employees earning less than $100,000 and is available for the next five years.
- Starter 401(k) plans
Effective in 2024, the SECURE Act 2.0 creates two new plans for employers with no retirement plans: a starter 401(k) deferral-only arrangement and a safe harbor 403(b) plan. These plans are simple and inexpensive to administer.
- Employee Plans Compliance Resolution System (EPCRS)
The SECURE Act 2.0 expanded the EPCRS, providing employers with more opportunities to self-correct plan errors.
- Retroactive elective deferrals for sole proprietors
Sole proprietors with no employees can retroactively establish a plan and make elective deferrals for the prior year, if they make them by the non-extended tax filing deadline.
- Replace SIMPLE with safe harbor 401(k)
In 2024, employers can elect to replace their SIMPLE IRA plan at any time during the year with any 401(k) plan that requires mandatory employer contributions.
- Reasonable crediting rate
Cash balance plans that use variable interest crediting rates can use a projected interest crediting rate that is “reasonable” up to a maximum of 6%.
Please contact your Mazars professional for additional guidance.
The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.