The “SECURE Act 2.0” was signed into law by President Biden and is effective immediately. The new legislation includes almost 100 different changes that are linked to retirement plans. Following is a brief summary of some of the changes that may affect your company’s retirement plans.
Child Birth/Adoption Expenses. The optional repayment period for repaying hardship withdrawals for child birth and adoption expenses is changed from being unlimited to three years.
RMD Ages. The required minimum distribution (RMD) age will be changed to age 73. It will change to age 75 as of January 1, 2033.
Small Business Owners. Sole proprietors and single-member LLC owners may make voluntary employee contributions to a new 401(k) plan as late as the employee’s tax filing due date for the plan’s initial year.
Hardship Self-Certifications. Plan Administrators may permit participants to self-certify that they qualify for a hardship withdrawal.
Small Incentives. Employers may offer small incentives, such as gift cards, to employees to encourage plan participation.
Age 50 Catch-Up Contributions. Age 50 catch-up contributions made to qualified plans must be made as Roth contributions by employees with compensation exceeding $145,000 (indexed). Other employees may still make catch-up contributions on a pre-tax basis.
Student Loan Repayments. Matching contributions may be made by employers to a 401(k) plan, 403(b) plan or a SIMPLE IRA plan for employees who make “qualified student loan payments” for their outstanding student loans.
New Hardships. New hardship withdrawals may be permitted for “emergency expenses” of up to $1,000 per year (with repayment options) and to domestic abuse survivors of up to lesser of $10,000 (indexed) or 50% of vested benefits.
Involuntary Cashouts. Under current rules, terminated employees with a retirement benefit worth $5,000 or less may be involuntarily cashed out. This $5,000 threshold is increased to $7,000.
DB Funding Notices. Defined benefit pension plans are already required to provide annual funding notices to participants. The notices will be required to explain funding issues more clearly.
Lump Sum Windows. Defined benefit pension plans that offer “lump sum window” programs will be required to provide additional information to employees who are being offered a one-time lump sum payment option. This won’t become effective until after the Department of Labor issues guidance, which may make this change effective during 2024.
Starter 401(k) Plans. Starter 401(k) or 403(b) plans may be offered by employers with no current retirement plan. Employees will be auto enrolled in the plan at a 3% to 15% deferral rate.
Sidecar Emergency Accounts. Employers have the option to create a “sidecar” emergency savings account for their non-highly compensated employees to be used for emergency withdrawals. The accounts are called sidecar accounts because they will be linked to, but separate from, the employer’s retirement plan. Employers may automatically opt employees into this arrangement with a “3% of salary” savings rate with a $2,500 savings cap. This change won’t become effective sooner than the government issues guidance.
Plan Amendments. Plan amendments that increase plan benefits retroactively may be adopted as late as the employer’s tax filing due date.
Age 60 Catch-Up Contributions. Age 50 catch-up contributions are limited to $7,500 for 2023. This limit will be increased by 50% for individuals age 60, 61, 62 or 63. For example, if the regular limit equals $8,000 for 2025, then the higher limit will equal $12,000 ($8,000 x 150%) for 2025 for those age 60, 61, 62 or 63.
Automatic Enrollment. New 401(k) and 403(b) plans must include automatic enrollment and automatic increase features starting at least at 3% and increasing 1% per year up to a maximum between 10% and 15%, inclusive. Excluded are pre-existing plans, businesses with 10 or fewer employees, new businesses, church plans and governmental plans.
Long-Term Part-Timers. Current rules require 401(k) plans to permit long-term part-time employees to make voluntary contributions after completing three consecutive years with at least 500 hours. The new law reduces the three-year requirement to two years and extends this rule to 403(b) plans governed by ERISA as well as to 401(k) plans.
Lost & Found Database. The U.S. Department of Labor is directed to create a national online database that may be used to locate plan participants who are missing.
Paper Benefit Statements. Defined contribution plans must provide a paper benefit statement at least once per year unless a participant elects otherwise. For defined benefit pension plans, the paper benefit statement must be provided at least once every three years.
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This material is for informational purposes only and is not intended to constitute legal advice.
