If your company offers a retirement plan, you have probably already seen about 700+ marketing emails letting you know that the “SECURE Act 2.0” was signed into law on December 29, 2022. The Act features 92 provisions and one thing to keep in mind as you sort through the various “summaries” that are being distributed, is that when an act is signed into law, it essentially is just approving a series of concepts. This is to say that each provision has varying degrees of clarity at this point and we’re already seeing quite a bit in the way of discussions about technical amendments.
So, get excited, but just don’t get too excited quite yet. This article focuses mainly on provisions that apply to existing corporate retirement plans- which is to say that it won’t focus so much on the provisions that apply to brand new plans. Further, it will go deepest into the provisions that are in effect right now, while provisions that are farther out (2024+) will be addressed at a higher level. You can expect quite a bit of follow up from us as those later-dated provisions begin to take on greater clarity. Note to existing Aldrich Corporate Retirement Plan clients: the action items mentioned here are already underway.
Focus on Now: Changes Effective January 1, 2023
Required Minimum Distributions (RMDs)
This is probably the most headline-grabbing piece of SECURE 2.0. Under prior rules, you were required to begin taking RMDs by April 1st of the year following the year you turned 72; however, SECURE 2.0 increases this age to 73, starting this year (Section 107). Another related aspect of this is the penalty for failing to take an RMD; that used to be 50% and now it has reduced to 25% (Section 302).
Action to consider: From an applicability standpoint (when someone should take an RMD), the age 73 requirement applies to anyone that attains age 72 after December 31, 2022. In most cases, a recordkeeper or third party administrator (TPA) will assist in determining when someone should receive an RMD and then work to process the payment, therefore, it would be advisable to reach out to the applicable service provider to ensure they are planning to administer RMDs in your plan under these new rules.
Roth Employer Contributions
Previously, when an employer made a contribution to a participant’s account (i.e. profit-sharing, match), the only option was for that contribution to be considered pre-tax, meaning taxation to the participant on that contribution would occur at the time of withdrawal (or conversion in the case of an in-plan Roth conversion). Now, plans have the option (via plan amendment) to allow participants that are 100% vested (this aspect is often missing in other articles) the option to pay the taxes on the employer contributions they receive, which in turn, essentially causes those contributions to become “Roth employer contributions.” From an employer standpoint nothing really changes, including the deductibility of employer contributions for tax purposes. If allowed by the plan, this is essentially a participant-by-participant decision (Section 604).
Action to consider: If you are interested in this option, the next step would be to inquire with your recordkeeper about whether they can accommodate this design. At this early stage, even if desired, it is unlikely that most recordkeepers will have the enhancements built out to make this a reality in your plan. Of course, you will also need to amend your plan in order to allow the option and that aspect of things still lacks clarity.
Certain notices are required to be provided to participants initially and annually thereafter, and SECURE 2.0 reduces this burden to some extent. In short, participants who have elected not to make 401(k) contributions will no longer be required to receive certain notices. They must still, however, receive the Summary Plan Description (SPD) and an annual notice reminding them that they can participate in the plan (Section 320).
Action to consider: There may not be much on this front. Most plans utilize their recordkeeper for required notice distribution services and these providers, more and more, have turned to distributing notices electronically (regardless of whether the plan complies with the electronic distribution rules, but that is a whole other article). Given the low cost involved with electronic distribution, you may not see much of a state of change, however, if you are distributing notices yourself, it might save some work, around annual notice delivery time (generally November for calendar year plans), to run some reports and see who needs the “full set of notices” and who needs to receive a smaller packet of information.
Hardship distributions can be a bit of an administrative burden, given the need to collect documentation to support the hardship. SECURE 2.0 allows employees to self-certify that they experienced an event that constitutes a hardship and therefore, they are permitted to take a hardship distribution (Section 312).
Action to consider: Our due diligence on recordkeepers has shown that many will not allow hardship distribution processing to be outsourced, due to the requirement to collect documentation to support that the request is legitimate. With this update, if you were not previously able to outsource, you may be able to now, given that participants could self-certify. Like most of these updates, while this may be possible, it may take some time for the recordkeepers to build out the ability to receive self-certification as part of the online request workflow.
Looking Ahead: Changes Effective January 1, 2024
Required Roth Catch-Up Contributions
This provision may catch a lot of higher income earners off guard. Currently, in 2023, if you are over age 50, you can contribute an additional $7,500 to your 401(k) plan and you may do this as either a pre-tax or Roth contribution. Effective January 1, 2024, if your wages in the prior year (2023) were more than $145,000, your catch-up contribution can only be made as a Roth contribution.
Required Minimum Distributions on Roth 401(k) Accounts
Going forward, Roth accounts inside a company retirement plan will no longer be required to take Required Minimum Distributions (RMDs) at, now, age 73. This change aligns with the rules that are in place for Roth Individual Retirement Accounts (IRAs) Section 325.
Student Loan Match
This has been a very hot topic for a number of years! Starting on January 1, 2024, employers will have the option to treat student loan payments as though they were contributions to the 401(k) plan, eligible for match (if offered by the plan). This will apply to “qualified student loan payments” which is defined as indebtedness incurred by employees solely to pay qualified higher education expenses (Section 110).
Increased Force Pay Threshold
Terminated participants can be an administrative burden that may also increase fiduciary risk. For this reason, many plans utilize a “Force Pay” provision in their plan to essentially transfer accounts out of the plan and into a third-party IRA solution. As of January 1, 2024, the threshold for doing this will be a vested balance of $7,000, however, until then, it remains at its current statutory level of $5,000 (i.e. if someone terminates and has a vested balance of $5,000 or under, they can be moved out of the plan and into an IRA). There is also an aspect of this that will increase portability, making it easier for these funds, which have been moved to an IRA, to be moved into the new plan of a former employee, with little or no action required on behalf of that former employee (in theory, we’ll see how this actually plays out) Sections 120 and 304.
Withdrawal for Emergency Personal Expenses
Plans may allow for one emergency withdrawal of up to $1,000 per year, without the withdrawal being subject to the 10% early withdrawal penalty rules (Section 115).
Ownership Attribution Rules
For certain aspects of annual compliance testing, “attribution” is an important thing to consider. Essentially, attribution means the position of one person is attributed to another; for example, if a business owner is considered a Highly Compensated Employee (HCE) and their child is employed at the same company, the child would be considered an HCE through attribution. SECURE 2.0 eliminates stock attribution rules for spouses who own separate and unrelated businesses, who reside in common property states (Section 315).
Retroactive Amendments to Increase Plan Benefits
Currently, amendments to increase benefits for a profit-sharing plan must be signed by the end of the plan year for which the amendment is effective (or March 15th of the year following for Cash Balance Plans). SECURE 2.0 modifies the rules for both plan types so that both now have until the due date of the company’s tax returns, including extensions (Section 316).
Longer-Term Considerations: Changes Effective in 2025+
Long-Term Part-Time Employees
Retirement plans can exclude employees who work less than 1,000 hours during a plan year. SECURE Act 1.0 addressed people that may work less than this, referring to them as “Long-Term Part-Time Employees” (LTPTE). Essentially, SECURE Act 1.0 mandated that LTPTEs must be allowed to make 401(k) contributions to their employer’s plan, if the LTPTE worked more than 500 hours each year, for three consecutive years. Under SECURE 2.0, this timeline reduces to two consecutive years. As with SECURE 1.0, while these LTPTEs must be allowed to make 401(k) contributions, they do not need to receive employer contributions; the eligibility requirements for employer contributions would still apply (i.e., the plan could require someone to work 1,000 hours or more to be eligible). Service prior to January 1, 2023 is excluded to determine the two consecutive years. Even though this does not go into effect until 2025, it would be wise to keep this on the radar and ensure it is being tracked (Section 125).
Increased Catch-Up Limit
Currently, anyone that is 50 or older can make a catch-up contribution of $7,500 (2023) to a 401(k) plan. Starting on January 1, 2025, the catch-up limit will increase for people ages 60-63 to the greater of $10,000 or 50% more than the regular age 50 catch-up amount in 2025 (which would be indexed for inflation and therefore could be higher than $10,000). Related to this, keep in mind the new rules about catch-up contributions needing to be Roth if you make more than $145,000 in the prior year; these rules will be in effect when this rule about higher contribution levels, is in effect (Section 109).
Expanding Automatic Enrollment
401(k) plans will be required to add automatic enrollment. However, plans established before SECURE 2.0 (December 29, 2022) are grandfathered in and do not need to make this addition – this would apply to you, most likely (Section 101).
Retirement Savings Lost and Found
This directs the Department of Labor (DOL) to create a national database for former participants to search for prior plan administrators in order to potentially recover funds they may have lost track of (Section 303).
RMD Age Increase, Part Two
The RMD age will increase to 75 in 2033, so you’ve got some time on this one.
We're Here to Help
Please keep an eye out for the invite to our virtual and live updates on SECURE 2.0 throughout the year and if you have any questions at all, please don’t hesitate to get in touch.
Lead Retirement Plan Consultant
Neil Plein, CPFA™, AIF®
Aldrich Wealth LP
Neil is a Certified Plan Fiduciary Advisor (CPFATM) and Accredited Investment Fiduciary (AIF®) who acts as the quarterback of a retirement plan. He guides employers through the overall plan management with the knowledge to do a deep dive into any aspect of plan operation. Neil connects the dots between internal staff and external service providers…
- Corporate retirement plans
- Recordkeeper selection
- Strategic planning and consultation
- One-to-one consulting participant meetings
- Certified Plan Fiduciary Advisor (CPFATM)
- Accredited Investment Fiduciary (AIF®)