January 19, 2023
SECURE 2.0 Act of 2022, was part of the Consolidated Appropriations Act, 2023, signed by President Biden on December 29, 2022. This Act makes numerous important changes to various retirement plan rules, affecting 401(k) and 403(b) plans, and enhances some changes made in the 2019 SECURE Act. A partial list of changes is contained in this article.
- Automatic enrollment. 401(k) and 403(b) plans established after December 29, 2022 must include automatic enrollment provisions for plan years starting after December 31, 2024.
- Required Distributions. The 2019 SECURE Act increased the age for required minimum distributions from 70 ½ to age 72 effective for individuals who attained 70 ½ in 2020 or later. SECURE 2.0 increases the required minimum distribution age from 72 to 73 for individuals who attain age 72 after December 31, 2022. The required minimum distribution age is increased to 75 for an individual who attains age 74 after December 31, 2032.
- The excise tax for failing to take required minimum distributions is reduced from 50% of the shortfall to 25% effective for taxable years beginning after December 29, 2022, and to 10% if the shortfall is corrected during a 2-year correction window.
- Catch-up Contributions. The catch-up contribution limit, which begins at age 50 (currently $7500 for 2023), is increased to the greater of $10,000 or 150% of the age 50 limit beginning in 2025 for participants aged 60-63 by the end of the applicable tax year.
- Roth Catch-up Contributions. Effective for tax years after 2023, catch up contributions will be made as Roth contributions (after tax)
- Match on Student Loan Repayments. For plan years beginning after December 31, 2023, 401(k) and 403(b) plans may make matching contributions based on student loan payments.
- Eligibility for Salary Deferrals for Part -Time Workers. The 2019 SECURE Act required that part time workers with 3 consecutive years of 500 hours be permitted to enter a plan for purposes of salary deferrals. SECURE 2.0 lowers that requirement to 2 years effective for Plan Years beginning after 2024. This requirement is mandatory and is in addition to the requirement that employees with 1000 hours of service in a year be allowed to enter the plan.
- Emergency Savings Accounts for Non-Highly Compensated Employees. Effective in 2024, plans may offer Emergency Savings Accounts, funded with Roth contributions, and capped at $2500. Participants must be allowed to take monthly withdrawals. These accounts must be invested in principal preservation accounts.
- Cash-out Limit Increased to $7000. Effective for distributions after 2023, plans may increase the $5000 cash out limit to $7000.
- Hardship Withdrawals. Effective for 2023 Plan Years, employers may rely on employees to self-certify that an event constitutes a safe harbor event for a hardship withdrawal.
In addition to the partial list of changes above, there is an increase in the 3-year credit for plan start- up costs effective in 2023 to 100% for employers with up to 50 employees, subject to a $5000 yearly cap. There is an additional start up credit for employer contributions for small employers of up to a per employee cap of $1000 phasing down from 100% of the employer contribution to 25% over 5 years. The credit is phased out for employers with 51-100 employees.
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This information is for educational purposes only to provide general information and a general understanding of the law. It does not constitute legal advice and does not establish any attorney-client relationship.