How SECURE 2.0 Changes Regulations for Retirement Savings PlansSubmitted by MIRUS Financial Partners on January 16th, 2023
On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. This Act expanded access to retirement plans for millions of Americans in several important ways.
Nearly three years later, Congress passed the Consolidated Appropriations Act of 2023, which included a successor retirement bill, SECURE 2.0 Act of 2022 (SECURE 2.0). This act brings a range of changes to retirement savings. We've included some highlights below. Changes are effective immediately unless otherwise noted
Changes in RMDs
The required minimum distribution (RMD) age is raised to 73 for people born from 1951 to 1958. People born after 1959 have an RMD of 75.
RMDs for Roth 401(k)s and 403(b)s are eliminated, reducing the need for Roth IRA rollovers from these plans. Effective January 1, 2024.
It allows a surviving spouse to make an election to be treated as the employee (deceased spouse), which allows the spouse to take RMDs from a deceased spouse’s employer-sponsored plan as if they were the employee (i.e., delaying RMDs until they would have taken them and using their age to calculate RMDs). Effective January 1, 2024.
The excise tax for missing an RMD (or a shortfall) is reduced from 50% to 25%. And if the mistake is corrected in a timely manner, the 25% amount is further reduced to 10%.
To the extent an RMD shortfall or excess contribution occurs, the statute of limitations is tied to filing an individual tax return (i.e., Form 1040) or the date the return would be filed if not otherwise required to file. The RMD statute of limitations is three years, while the excess contribution limit is six years.
It expands EPCRS (Employee Plans Compliance Resolution System) to include Individual Retirement Accounts and Individual Retirement Annuities for purposes of missed RMDs for owners and certain situations for beneficiaries. EPCRS is a system for self-correcting mistakes with retirement accounts to bring them into compliance and maintain tax benefits.
Indexing for Inflation
IRA (Individual Retirement Account) catch-up contributions will now be indexed for inflation in the same manner as the indexing for regular IRA contributions. Effective January 1, 2024.
Changes in Catch-up Contribution Regulations
401(k) and similar plan catch-up contributions limits increase for individuals between 60 and 63 to the greater of $10,000 ($5,000 for (Savings Incentive Match Plans for Employees) SIMPLE plans) or 150% of the regular catch-up amount. Effective January 1, 2025.
All qualified catch-up contributions must receive Roth tax treatment except for participants whose prior year wages are $145,000 or less. This does not apply to SIMPLE or SEP IRAs. Effective January 1, 2024.
More Flexible Roth IRAs
529-to-Roth IRA transfers can be made tax and penalty-free to a Roth account for the same 529 beneficiary if the 529 account was open for 15+ years or if the amount does not exceed annual Roth IRA contribution limits or a lifetime maximum of $35,000. Effective January 1, 2024
The Act allows SEP (Simplified Employee Pension) and SIMPLE plans to be designated as Roth IRAs.
It also immediately allows individuals to designate matching contributions, including student loan contributions, as Roth contributions.
Employer retirement plans can treat qualified student loan payments as elective deferrals for matching purposes. Effective January 1, 2024.
The Act permits a one-time $50,000 QCD (Qualified Charitable Distribution) to a split-interest entity (i.e., CRAT (Charitable Remainder Annuity Trust), CRUT (Charitable Remainder Unitrust), charitable gift annuity), and indexes QCD contributions for inflation beginning after 2023.
Long-Term Care Insurance
Distributions up to $2,500 annually paid as premiums to a long-term care insurance contract are not subject to the 10% early distribution penalty. Effective 3 years from DOE.
New 401(k) and 403(b) plans must meet the auto-enrollment requirements in employer-sponsored plans for eligible employees except for certain small businesses, new businesses, church plans, and governmental plans, among others. Effective January 1, 2025.
Changes in Saver's Credit
Rather than a nonrefundable credit (i.e., the existing Saver’s credit) for contributions to individual retirement accounts (IRAs), it will be replaced by a refundable federal matching contribution into the taxpayer’s IRA or retirement plan. Effective January 1, 2027.
The Starter 401(k) creates two plans for employers without a sponsored retirement plan: a deferral-only arrangement or a safe harbor 403(b) plan. Effective January 1, 2024.
More Accessibility for Some
ABLE accounts can be established for those with a disability occurring before age 46 up from the current age of 26. Effective January 1, 2026.
Part-time workers only need two consecutive years of 500+ hours to qualify for retirement plan participation. Effective January 1, 2025.
It excludes service-connected disability pension payments from gross income for first responders after retirement age. Effective January 1, 2027.
It clarifies that in the case of a special needs trust (SNT) as an IRA beneficiary, the SNT beneficiary will not lose eligible designated beneficiary status if a non-natural entity, such as a charity, is named as a remainder beneficiary.
Easier to Access Funds Earlier
SECURE 2.0 permits one penalty-free withdrawal of up to $1,000 once every 3 years (if not repaid) annually for unforeseeable and immediate financial needs related to personal or family emergency expenses. Effective January 1, 2024.
Employers can now offer an emergency savings account and a retirement account, allowing employees to contribute up to $2,500 annually. The employer would consider the contribution as a deferral for matching employee contributions, and the distributions to the employee would be tax-free. Effective January 1, 2024.
The Act changes the current exception to the 10% penalty for early distributions for public safety employees who terminate employment after age 50 in governmental plans. It now includes private-sector firefighters and correction officers.
Distributions to a terminally ill individual are not subject to the 10% early distribution penalty.
Distributions to an individual accessed because of a domestic abuse situation are not subject to the 10% early distribution penalty for the lesser of 50% of the total account balance or $10,000. Effective January 1, 2024.
The substantial periodic payment exception continues to apply in the case of a rollover of the account, an exchange of an annuity, or any annuity that satisfies the RMD rules. Effective January 1, 2024.
Changes to Annuities and Insurance
SECURE 2.0 removes certain restrictions on life (income) annuities in retirement plans that would allow contracts to potentially have COLA (cost of living adjustment) on payments, lump-sum payments that reduce or eliminate future payments, dividends, return of premium less premium death benefits, or payments up to 12 months in the future payable now.
It removes the previous 25% limit on purchases on QLACs (qualified longevity annuity contracts) and allows up to $200,000 to be used from a retirement account to purchase a QLAC.
It requires the Treasury Secretary to revise regulations and allow for the use of Insurance Dedicated Exchange Traded Funds. Regulations must be updated within 7 years of DOE.
Eliminates penalty on partial annuitization by permitting account owners to elect the aggregate distributions from both portions of their account when determining annual RMDs.
Retirement Savings Plan Guidelines Change for Employers
SECURE 2.0 allows an employer to make additional contributions to each employee of a SIMPLE plan, not to exceed the lesser of 10% of compensation or $5,000. Effective January 1, 2024.
It also allows an employer to replace a SIMPLE IRA with a safe harbor 401(k) plan at any time during the year if they meet specific criteria. Effective January 1, 2024.
It changes contribution limits to certain SIMPLE IRAs as follows:
- For employers with 25 or fewer employees, employees would have deferral and catch-up contributions increased by 10%.
- For employers with more than 25 employees, current limits are imposed unless they increase their matching contributions to 4% or their regular contributions to 3%. Effective January 1, 2024.
SECURE 2.0 also increases credit for qualified start-up costs for employers with 50 or fewer employees from 50% to 100%, with an additional credit for 5 years of $1,000 per employee.
It expands gain deferral provisions with a 10% limit on the deferral to sales of employer stock to S corporation ESOPs (Employee Stock Ownership Plans). Effective January 1, 2028.
It permits employers to fund retirement plans with employee contributions for the prior year up to the original filing deadline rather than the end of the taxable year. Effective January 1, 2024.
It also allows sole proprietors and single-member LLCs to fund new employee retirement plans with elective deferrals for the prior year up to the original filing deadline rather than the end of the taxable year.
It also allows unrelated small businesses and startups to reduce plan costs by offering their employees multiple-employer 401(k)-like retirement savings plans, or “MEPs.” Before the SECURE Act 2.0, any participating businesses were required to be related in some way, such as through membership in a trade association. The SECURE Act waived that requirement, making it possible for new and small businesses to participate in multi-employer plans.
Confused? We're Here to Help
The SECURE Act 2.0 includes a long list of regulations surrounding retirement funds and tax-deferred savings plans. This list article includes some highlights of changes but is not comprehensive.
Changes in legislation can feel overwhelming, but Mirus Financial Partners is here to help. Feel free to contact us for more information. We're happy to answer your questions.