SECURE 2.0: What You Need to Know

Just three short years after the passage of some of the most significant changes to the U.S. retirement saving and funding system in the form of the SECURE Act (text of which can be found here), Congress has passed “SECURE 2.0” as part of the recent spending package, the 2023 Consolidated Appropriations Act (full text of the $1.7T appropriations Bill can be found here, with Division T covering SECURE 2.0, a Senate Finance Committee summary of which can be found here). The Omnibus Bill is expected to be signed into law by President Biden ahead of the December 30th government funding deadline.

SECURE 2.0, a collection of several separate House and Senate proposals, picks up where SECURE left off in terms of further expanding access to workplace retirement plans and encouraging sound savings and retirement preparation habits.

As a refresher, a few of the notable changes under SECURE include (i) modifying the required beginning date (i.e., the date the participant must commence mandatory withdrawals from the account) increased from 70.5 to 72 years of age, (ii) capping beneficiary distribution period for most account beneficiaries (i.e., substantially limiting of the "stretch" distribution scheme) except those who qualify as Eligible Designated Beneficiaries, and (iii) repealing the age limit for traditional IRA contributions.

The following is a non-exhaustive summary of selected changes included in SECURE 2.0. [NOTE: As with most summaries, please note that many exceptions may exist to the following provisions.]

• Increased RBD. The required beginning date (“RBD”) (the date that required minimum distributions (“RMD”) must commence for traditional accounts) will increase from 72 to 73 as of January 1, 2023 and to 75 as of January 1, 2033.

• Opt-out Enrollment. Contrary to current practice, which requires employees to affirmatively enroll in employer-sponsored plans when eligibility requirements are met, SECURE 2.0 provides for automatic enrollment for all employees upon eligibility compliance (i.e., “opt-out” rather than “opt-in”), resulting in automatic contributions unless the employee affirmatively declines participation in the plan. The initial enrollment amount will be 3–10%, with 1% annual increases until the contribution amount reaches 10%, not to exceed 15%. Exceptions apply to employers with ten or fewer employees and employers that have been in business for less than three years, among others. Effective for plan years beginning after December 31, 2024.

• Expanded Access for Part-Time Workers. The current requirement that an employee must either complete one year of service (with 1,000 hours worked) or three consecutive years of service (with at least 500 hours of service) will be relaxed to either one year/1,000 hours or two years/500 hours. Effective for plan years beginning after December 31, 2024.

• Additional Catch-Up. While employees over age 50 can make “catch-up” contributions to qualified retirement accounts ($7,500 in 2023 for 401(k), 403(b), and most 457 plans), SECURE 2.0 increases these limits for employees between ages 60–63 to the greater of $10,000 or 50% more than the regular catch-up amount, indexed for inflation after 2025. Effective for taxable years beginning after December 31, 2024. The IRA catch-up amount of $1,000 will also be indexed for inflation after December 31, 2023.

• Roth Catch-up. Employee catch-up contributions must be made with after-tax dollars for all employees with compensation over $145,000, indexed for inflation. Effective for taxable years after December 31, 2023.

• Elimination of Roth 401(k) RMDs. Roth employer retirement plans (e.g., 401(k)s) will not require RMDs during the participant’s life, consistent with the distribution rules for Roth IRAs, effective for taxable years beginning after December 31, 2023.

• Roth Employer Match. Employer matching contribution may be made on a Roth basis, effective on the date of enactment of SECURE 2.0.

• SIMPLE and SEP Roth. SIMPLE IRAs and SEPs may now accept contributions on a Roth basis. Effective for taxable years beginning after December 31, 2022.

• Student Loan Repayment Match. Employers will be allowed to make matching “qualified student loan payments” under 401(k), 403(b), 457(b), or SIMPLE IRA plans. Effective for matching contributions made for plan years beginning after December 31, 2023.

• 529 to Roth Rollover. Unused § 529 college savings plan can now be rolled over on a tax- and penalty-free basis to a Roth IRA subject to conditions including, but not limited to, a $35,000 lifetime maximum rollover amount, application of standard annual IRA contribution limits, and the 529 account must have been in existence for at least 15 years. Effective for distributions after December 31, 2023.

• Emergency Withdrawal and Savings. An exception to the typical 10% early withdrawal penalty from tax-preferred retirement accounts before the age of 59½ will be allowed for unforeseeable or immediate emergency expenses. An annual distribution total of $1,000 is permissible and a taxpayer may repay the distribution within three years. Effective for distributions made after December 31, 2023. Employers may also establish after-tax elective deferral savings accounts for non-highly compensated employees, not to exceed 3% of compensation or a maximum account balance of $2,500.

• Penalty Reduction. The excise tax for failing to take RMDs will be reduced from 50% to 25% and further reduced to 10% if timely corrected. Effective for taxable years beginning after enactment of SECURE 2.0 (likely January 1, 2023).

• Statute of Limitations for Excise Tax. For failure to timely withdraw an RMD, a three-year statute of limitations will apply to the imposition of excise tax and, in the case of excess contributions to a qualified account, the relevant period of limitations is six years. Both limitations periods commence when the taxpayer files his or her Form 1040 for the year of the missed RMD or excess contribution. Effective as of the date of enactment of SECURE 2.0.

• Expanded Saver’s Credit. The Saver’s Credit––a low-earner’s tax credit for contributions to retirement accounts––is now a federally funded match into the account (which must be repaid if the participant withdraws the money before retirement), rather than a deduction. The maximum match is $1,000 (up to 50% match on the first $2,000 contributed) and phases out between $20,500–$35,500 for single filers and $41,000–$71,000 for married filing jointly. Effective for taxable years beginning after December 31, 2026.

• Annuity Inclusion Flexibility. Several changes apply to annuities that are, in theory, intended to eliminate barriers preventing retirement plans from holding annuity contracts. These provisions have differing effective dates.

• Incentives for Contributions. Employers can now offer de minimis financial incentives (like gift cards in small amounts) to join their retirement plans, to encourage employee participation in workplace retirement plans. Effective for plan years beginning after the date of enactment of SECURE 2.0.

• Account Lost & Found. The Department of Labor must create a national searchable database to assist participants (and employers) who might have lost track of their qualified account. Such database shall be created no later than two years after the date of enactment of SECURE 2.0.

The rules in the area of retirement savings seem to be in constant flux. Thus, we recommend that advisors make an effort to stay current with these changes in order to best serve their clients.

For any questions related to this blog post or any other estate planning matters, please feel free to contact me at (214) 744-3700 or jsimons@meadowscollier.com.