In December, a government spending bill was signed into law with several significant retirement provisions. Here are some of the significant tax and retirement-related provisions included in the SECURE 2.0 Act of 2022.
Expanded Automatic Enrollment in Retirement Plans
For retirement plans set up after the enactment date of SECURE 2.0, employers must provide for automatic contributions of at least 3% and not more than 10% during an employee’s first year of participation, unless the employee chooses otherwise.
Effective on the first day of each plan year after a completed year of participation, the contribution percentage must automatically increase by 1 percentage point to at least 10% but not more than 15%. This provision is effective for plan years beginning after December 31, 2024.
Increase in Age for Required Minimum Distributions (RMDs)
Retirement plans subject to RMDs just got a bump up in the age requirement. Under current law, the age to start RMDs is 72. That will change to age 73 for those that turn 72 after 12/31/2022 and to age 75 for those that turn 74 after 12/31/2032.
Higher Catch-up Limit
Starting in 2025, individuals reaching the age of 60 will be allowed $10,000 of catch-up retirement contributions. However, for individuals with income greater than $145,000 these added contributions will be subject to mandatory Roth treatment.
Penalty Free Withdrawals for Certain Emergency Expenses
SECURE 2.0 provides an added exception to the 10% penalty tax for early distributions from retirement accounts. There is now an exception for certain distributions used for emergency expenses, such as unforeseeable or immediate financial needs relating to personal or family emergency expenses. These emergency expenses are capped at $1,000.
New Retirement Plan Designs
Two new retirement plan designs were created by SECURE 2.0 and will become available in 2024. First is a new type of section 401(k) plan called “starter 401(k) deferral-only arrangement” and second is a new type of 403(b) called a “safe harbor 403(b) plan.”
These plans are designed to reduce cost barriers for small businesses to offer employees retirement plans. Two of the significant benefits of these plans are no major year-end testing requirements and no employer contribution requirements.
Improving Coverage for Part-Time Workers
The first edition of SECURE required “long-term part-time employees” to be eligible for employer retirement plans. These individuals were defined as those working at least 500 hours per year for three consecutive years and meeting all other eligibility requirements of the retirement plan. SECURE 2.0 has reduced that requirement from three consecutive years to two.
Reduction in Excise Tax for Not Taking RMDs
Under current law, the penalty tax for not taking enough RMD is 50% of the amount by which the calculated RMD exceeds the actual amount distributed during the calendar year. SECURE 2.0 reduces the 50% amount down to 25% and further reduces the 25% down to 10% if the failure to take the RMD is corrected in a timely manner.
Optional Treatment of Employer Contributions as Roth Contributions
In SECURE 2.0, employers can amend retirement plans and allow employees to designate employer contributions to their account as Roth contributions.
Modification of Credit for Small Employer Pension Plan Start-up Costs
The Act changes the small employer pension plan start-up cost credit by:
- Providing credit equal to the entire amount of creditable costs (qualified start-up costs) of an employer with 50 or fewer employees (up to an annual cap)
- Allowing a credit amount for employer contributions to small employer pensions
- Fixing a technical glitch for small employers who join multi-employer plans
Tax-Free Rollovers from 529 Accounts to Roth IRAs
SECURE 2.0 allows the beneficiary of a 529 college savings account to make direct rollovers from a 529 account to a Roth IRA in their name without tax or penalty. The 529 account must have been open for 15 years, lifetime rollovers under the provision cannot exceed $35,000, and annual contribution limits are in play (income limitation is waived).