•    Expanding Coverage and Increasing Retirement Savings
•    Income Preservation
•    Simplification and Clarification

Expanding Coverage and Increasing Retirement Savings

“By failing to prepare, you are preparing to fail” – Ben Franklin*

Auto-Enrollment and Escalation – for New Defined Contribution Plans:³

New 401(k) and 403(b) plans will be required to auto-enroll newly eligible employees to at least 3%, but no more than 10% in year one. Beginning in the second year, a deferral increase of 1% up to 10%, but no more than 15%, begins.  This provision applies to plans established on or after January 1, 2025. All plans established by December 31, 2024 are grandfathered and not impacted. 

Applicable to plans: 401(k), 403(b) plans established after January 1, 2025. Church, government plans, certain new, and small plans will be exempt.  
Effective date: Plans established on or after January 1, 2025
Required or optional: Required

Increase in the Required Minimum Distribution (RMD) Age:⁴

The RMD age for 2023 is 73. The RMD age will increase again in 2033 to age 75.  Additionally, any penalty for not taking a RMD will be reduced from 50% to 25% and could be reduced further to 10% if corrected in a timely manner.   

Applicable to plans: Defined Contribution and Defined Benefit Plans. Also applicable to both traditional and Roth IRAs. Beginning in 2024, required minimum distributions from designated Roth accounts will be eliminated. 
Effective date: January 1, 2023
Required or optional: Required

Expansion of Roth Account Contributions:⁵

The ability for taxpayers to fund any or all of their retirement accounts with pre-tax or Roth contributions provides important flexibility for retirement planning purposes. This provision makes changes to catch-up and both matching and non-elective employer contributions. 

Beginning in 2023, Roth contributions are allowed in both SIMPLE IRA and Simplified Employee Pension (SEP) IRA plans. Beginning in 2024, required minimum distributions from designated Roth accounts will be eliminated.                                                                       

•    Roth Catch-up – Any catch-up contributions for employees earning more than $145,000 for the prior year will be subject to Roth contribution tax treatment. Catch-up contributions made by employees with wages under $145,000 will continue to be treated as pre-tax contributions unless the employee elects to make such contributions on a Roth basis. 

Applicable plans: 401(k), 403(b) and 457(b)
Effective date: January 1, 2024
Required or optional: Required

•    Matching and Non-elective Contributions – Plan Sponsors may provide participants the option to receive matching contributions or company non-elective contributions on a Roth basis. Any matching contributions and/or non-elective contributions need to be fully vested when contributed to the plan.

Applicable plans: 401(k), 403(b) and 457(b)
Effective date: January 1, 2023
Required or optional: Optional

Higher Catch-up Limits – Ages 60, 61, 62 and 63:⁶

Beginning in 2025, employees who have attained ages 60, 61, 62 and 63 will be permitted to make higher catch-up contributions.

For qualified plans, the catch-up limits for this specific age group will increase to the greater of $10,000 or 150% more than the regular catch-up amount in 2025. After 2025, catch-up amounts will be indexed for inflation.

For a SIMPLE IRA or a Simplified Retirement Plan (SEP), catch-up contributions will increase to $5,000.

For Individual Retirement Accounts (IRAs) the catch-up contribution amount is currently set at $1,000. Beginning in 2024, the catch-up contribution amount will be indexed for inflation in $100 increments.

Applicable plans: 401(k), 403(b), SIMPLE IRA, IRA
Effective date: January 1, 2025 (IRA’s effective January 1, 2024)
Required or optional: Required                                           

Wider Eligibility for Long-term, Part-time Workers:⁷

In defined contribution plans, eligibility would be attained after two consecutive years of 500 or more hours. Also, pre-2021 service will not be considered for vesting purposes. This provision does not take effect until January 1, 2025.  The current three-year provision for long-term, part-time workers applies through the end of 2024.

Applicable plans: 401(k), 403(b) plans subject to ERISA
Effective date: January 1, 2025
Required or optional: Required

Pooled Employer Plans (PEP) Modification:⁸

This provision clarifies that a pooled employer plan (“PEP”) may choose to designate a named fiduciary, other than an employer in the plan, to collect contributions. The fiduciary would be required to implement written procedures that are reasonable, diligent and systematic.

Applicable plans: Pooled Employer Plans (PEPs)
Effective date: January 1, 2023
Required or optional: Optional 

403(b) Plans – Access to Multiple Employer Plans (MEP):⁹

MEPs provide an opportunity for small employers to band together to obtain more efficient and generally less expensive plan management and administration services. 403(b) plans, which are generally sponsored by charities, educational institutions and non-profits, are now allowed to participate in MEPs and PEPs.  The provision also includes relief from the “one bad apple rule” so that violations of one employer do not affect compliant employers.

Applicable plans: 403(b)
Effective date: January 1, 2023
Required or optional: Optional

403(b) Plans – Investment Enhancement:¹⁰

Historically, 403(b) plan investments were limited to annuity contracts and publicly traded mutual funds. This provision permits collective investment trusts (CITs), generally available at a lower overall cost, to be permitted in 403(b) custodial accounts. 

Applicable plans: 403(b)
Effective date: January 1, 2023
Required or optional: Optional

403(b) Plans – Hardship Withdrawal Enhancement:¹¹

This provision will align 403(b) hardship withdrawal rules to mirror 401(k) rules. More sources will be allowed, including investment earnings in determining a hardship withdrawal.

Applicable plans: 403(b)
Effective date: January 1, 2024
Required or optional: Optional

Emergency Expense Withdrawal:¹²

Early distributions from retirement accounts generally are subject to a 10% early withdrawal tax. This provision allows for an exception for distributions used for emergency expenses considered unforeseeable or for the immediate financial needs for you or your family. Only one distribution is permissible per year up to $1,000. There will be an option to repay the distribution within three years, but it is not required. No further emergency distributions are permissible during the three-year repayment period unless repayment occurs. An exception is made for a person with a terminal illness requesting an early withdrawal, which is effective December 29, 2022.

Applicable plans: Defined Contribution Plans
Effective date: January 1, 2024
Required or optional: Optional

Emergency Savings Account:¹³

Many studies have shown that almost half of Americans would struggle to cover an unexpected expense, forcing many to tap into retirement savings. Differentiating emergency savings from retirement savings may assist an employee in managing a short-term emergency without taking a hardship withdrawal or reducing savings rates, which impacts long-term retirement savings. This provision allows employers the option to offer an Emergency Savings Account to their non-highly compensated employees (NHCEs). Employers may automatically opt employees into these accounts at no more than 3% of their salary, and the portion of an account attributable to the employee’s contribution is capped at $2,500, unless the employer sets a lower limit.

Contributions are made on a Roth-like basis to a capital preservation investment and treated as elective deferrals for purposes of retirement matching contributions.

Applicable plans: Defined Contribution Plans
Effective date: January 1, 2024
Required or optional: Optional

Student Loan Payments – Employer Matching Contributions:¹⁴

Many employees find it difficult to save for retirement while paying for student loans. This provision is intended to assist employees who may miss valuable employer matching contributions for retirement plans, when focused on paying down student debt. 

An employer will be permitted to make matching contributions for qualified student loan payments, incurred by the employee solely to pay qualified higher education expenses.

Governmental employers are also permitted to make matching contributions in a section 457(b) plan or another plan with respect to such repayments. For purposes of the nondiscrimination test applicable to elective contributions, this provision provides relief by allowing the population receiving matching contributions on student loan repayments to be tested separately.

Applicable plans: 401(k), 403(b), 457(b) and SIMPLE IRA
Effective date: January 1, 2024
Required or optional: Optional                                                 

Automatic Portability Service:¹⁵

Under current law, an employer is permitted to distribute a participant’s account balance without participant consent if the balance is under $5,000 and the balance is immediately distributable – for example, a terminated participant. Employers are required to roll over this distribution into a default IRA if the account balance is at least $1,000 and the participant does not affirmatively elect otherwise.

This provision allows plans to engage with service providers to provide automatic portability of default IRAs, enabling an automatic rollover of the amount in the default IRA into the participant’s new employer’s retirement plan, unless the employee elects otherwise.

Applicable plans: Defined Contribution Plans
Effective date: December 29, 2023
Required or optional: Optional

Increase Cash-out Limit:¹⁶

The cash out limit for smaller account balances will increase from $5,000 to $7,000 on January 1, 2024.

Applicable Plans: Defined Contribution, Defined Benefit
Effective date: January 1, 2024
Required or optional: Required

Distributions from 529 programs to Roth IRAs:¹⁷

Families and students have concerns about potential leftover funds being in 529’s unless they take a non-qualified withdrawal and penalty‐free rollovers from 529 accounts to the beneficiary’s Roth IRA. The 529 account must have been open for at least 15 years and would be capped at $35,000 over the beneficiary’s lifetime and subject to annual limits.

Applicable plans: 529 Plans
Effective date: January 1, 2022
Required or optional: Optional              

Income Preservation

“Beware of little expenses, a small leak will sink a great ship” – Ben Franklin*

Remove Required Minimum Distribution Barriers - Life Annuities:¹⁸

This provision eliminates certain barriers to the availability of life annuities in qualified plans and IRAs that arise under current law due to an actuarial test in the required minimum distribution regulations. The test is intended to limit tax deferral by precluding commercial annuities from providing payments that start out small and increase excessively over time. In operation, however, the test commonly prohibits many important guarantees that provide only modest benefit increases under life annuities.

For example, guaranteed annual increases of only 1 or 2%, return of premium death benefits and period certain guarantees for participating annuities are commonly prohibited by this test. Without these types of guarantees, many individuals are unwilling to elect a life annuity under a defined contribution plan or IRA.

Applicable plans: Defined Contribution Plans
Effective date: December 29, 2022
Required or optional: Optional

Qualifying Longevity Annuity Contract (QLAC) Reform:¹⁹

Qualifying longevity annuity contracts (QLAC’s) are deferred annuities that begin payment at the end of an individual’s life expectancy. However, the RMD rules were an impediment to the growth of QLACs in defined contribution plans and IRAs because RMD payments generally begin at age 73, before QLACs begin payments. Regulations generally exempted QLACs from the minimum distribution rules but due to a lack of statutory authority to provide a full exemption, the regulations imposed certain limits that have prevented QLACs from achieving their intended purpose in providing longevity protection. This provision addresses these limitations by repealing the 25% limit and allowing up to $200,000 (indexed) to be used from an account balance for a QLAC.  

This provision also facilitates the sales of QLACs with spousal survival rights and clarifies that free-look periods are permitted up to 90 days with respect to contracts purchased or received in an exchange on or after July 2, 2014.

Applicable plans: 401(k), 403(b), IRA
Effective date: December 29, 2022
Required or optional: Optional

Eliminating a Penalty on Partial Annuitization - RMD’s:²⁰

If a tax-preferred retirement account also holds an annuity, current law requires the account be split between the portion of the account holding the annuity and the rest of the account for purposes of applying the RMD rules. This may have inflated the RMD to a greater amount than the minimum. This provision eliminates a penalty on partial annuitization by permitting account owners to elect to aggregate distributions from both portions of their account for purposes of determining minimum distributions.

Applicable plans: Defined Contribution
Effective date: December 29, 2022
Required or optional: Required

Simplification and Clarification

“Lost time is never found again” – Ben Franklin*

Retirement Savings Lost and Found:²¹

Many employees approach retirement but are unable to find and receive the benefits they earned because the company they worked for moved, changed its name or merged with a different company. Similarly, employers around the country are ready to pay benefits to retirees, but are unable to find them due to changed names or addresses. This provision creates a national online searchable lost and found database for retirement plans at the Department of Labor (“DOL”). The database will enable individuals who might have lost track of their pension or 401(k) plan to search for the contact information of their plan administrator.

Applicable plans: Defined Contribution and Defined Benefit
Effective date: before December 29, 2024
Required or optional: Required

Recovery of Plan Overpayments:²²

Sometimes retirees mistakenly receive more money than they are owed from their retirement plans due to an administrative or clerical error. Plans can require retirees to repay the amount of the overpayment, plus interest. Even a small overpayment can potentially become difficult for a retiree to pay back. This provision allows retirement plan fiduciaries the option to not recover overpayments mistakenly made to retirees. Plan fiduciaries will still retain the option to recoup overpayments but would need to follow limitations and protections to safeguard retirees.

Applicable plans: Defined Contribution and Defined Benefit
Effective date: December 29, 2022
Required or optional: Optional

Employee Certification for Hardship Withdrawals:²³

Previously, self-certification by a participant was allowed for hardship withdrawals but was the plan’s responsibility to maintain sufficient information for compliance purposes. This provision allows the plan administrator to rely on participant certification for both the type and amount of the financial need, unless the plan administrator has direct knowledge to the contrary.

Applicable plans: 401(k), 403(b)
Effective date: January 1, 2023
Required or optional: Optional

457(b) Plan Enhancement:²⁴

Previously, participants in a governmental 457(b) were required to request changes in their deferral rate prior to the beginning of the month in which the deferral would be made. This provision eliminates the “first day of the month” rule, which no other type of plan requires.

Applicable plans: 457(b)
Effective date: January 1, 2023
Required or optional: Required

Section 420 Transfers Extension:²⁵

Section 420 allows transfers from a pension plan to pay retiree health and life insurance benefits, provided the pension plan is over 125% funded, through the end of 2032. This provision was previously set to expire on December 31, 2025.

This provision also adds a de minimis transfer of no more than 1.75% of plan assets if the plan is at least 110% funded. Additionally, the cost maintenance period is extended from five to seven years. 

Applicable Plans: Defined Benefit
Effective date: December 30, 2022
Required or optional: Optional

Termination of Variable Rate Premium Indexing:²⁶

This provision removes “applicable dollar amount” language in the rules for determining the premium fund target for purposes of unfunded vested benefits and replaces it with a flat $52 for each $1,000 of unfunded vested benefits.

Applicable plans: Defined Benefit
Effective date: January 1, 2023
Required or optional: Required

Lump Sum Window – Participant Disclosure²⁷

Defined benefit plans at times may offer participants an opportunity to receive a lump sum payout instead of an annuity. A cash lump sum could be enticing but could also be a bad financial decision. This provision requires new disclosures for plans that offer a lump sum window to participants. A comparison of the benefit of staying in the plan versus a lump sum payout, explanation of how the lump sum was calculated and other important information to help individuals choose the best option for them would be required to be in the disclosure. The DOL must issue regulations implementing this provision, as well as provide a model notice, but will not occur before December 29, 2023.

Applicable plans: Defined Benefit
Effective date: After December 29, 2023 (TBD)
Required or optional: Required

Cash Balance Plans – Backloading Benefit Accruals:²⁸

This provision clarifies existing IRS Code and ERISA’s rules, prohibiting the backloading of benefit accruals, as they relate to hybrid plans (cash balance) that credit variable interest. Specifically, that the interest crediting rate be a reasonable projection subject to a 6% maximum. This clarification will allow Plan Sponsors to provide larger pay credits for older, longer service workers.

Applicable plans: Cash Balance Plans
Effective date: January 1, 2023
Required or optional: Required

Summary

SECURE Act 2.0 is the most comprehensive retirement legislation in decades. It was designed to expand access and increase savings opportunities, help individuals preserve income and create efficiencies for both employees and employers. Be advised that this summary does not cover all 92 provisions, and there are varied effective dates – some retroactive and others into the future. Additionally, we fully expect several provisions will require additional guidance from the Treasury Department and the Department of Labor.

This a perfect time to discuss what options are available to enhance your retirement benefits. If you have any questions on SECURE Act 2.0, please contact any of the professionals at Fiducient Advisors. Our Consultants are ready to speak with you in greater detail about the impact of the mandatory provisions and optional opportunities available to you.

*Ben Franklin Quotes are from the “Art of Virtue” - Ben Franklin.  Franklin conceived of this book in 1732 but never actually got around to writing it. In 1986, editor George Rogers completed the book by researching Franklin's writings of common-sense sayings.