SECURE 2.0 Act Update

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was created for employer-sponsored retirement plans to encourage more Americans to save for their future. As of December 29, 2022, the SECURE 2.0 Act provisions do even more to help increase the ability of Americans to save for retirement. Below are a few takeaways from the SECURE 2.0 Act:

Plan Start-Up Tax Credit

One of the major changes includes tax credits for employers starting a new plan. Companies are now eligible for a tax credit covering 100% (up from 50%) of the administrative expenses incurred to establish a retirement plan up to $5,000 for the first three years of a retirement plan established by employers with up to 50 employees beginning in the 2025 plan year. Additionally, small businesses are now eligible for a dollar-for-dollar tax credit toward company match for each employee (up to $1,000 per employee) for the first 5 years. For example: if a company matches $1,200 in 2023 for 1 employee, that company will receive a $1,000 credit. If the company matches $800 for another employee, the company will receive an $800 credit. If the company matches $1,000 for 5 employees, that’s $5,000 in tax credits. This credit phases out over five years with further reductions for employers between 51 and 100 employees.

Automatic Enrollment Requirement

Another key provision of the SECURE 2.0 Act states that if an employer establishes a 401(k) or 403(b) after December 29, 2022 that eligible employees must automatically be enrolled in the plan beginning in the 2025 plan year. Beginning in 2025, employers with more than 10 employees will be required to automatically enroll new employees in the plan at a pretax contribution of at least 3% of the employees pay with a cap at 10% of the employee’s pay. The annual contribution rate must increase by 1% (up to at least 10%) but not more than 15% of the employee’s pay. Employees can opt out or elect a different contribution. The plan must allow automatically enrolled employees the option to opt out within 90 days and receive back their contributions to the plan.

Expanded Catch-Up Contributions

Beginning in 2025, the SECURE 2.0 Act will increase the annual catch-up contribution amount for participants ages 60-63 to $10,000. The existing current law will remain in effect for employees who have reached age 50. Beginning in 2023, participants aged 50 and older can contribute an extra $7,500 annually to their 401(k) account. It is important to note that an inadvertent error in the Secure 2.0 Act could keep retirement plan participants from making catch-up contributions in 2024. As the statute currently states, beginning in 2024 retirement plan participants will not be able to make catch-up contributions which applies to both pre-tax and Roth catch-up contributions. This was an obvious technical drafting error, and a Congressional Technical Correction will need to be passed to correct the inadvertent error.

Required Minimum Distributions (RMDs)

The SECURE 2.0 Act also includes provisions related to required minimum distributions (RMDs). The age requirement for participants to begin taking RMDs is increased from 72 to age 73 beginning in 2023. The age requirement will change to 75 beginning in 2033. Additionally, the penalty for not taking an RMD will be reduced from 50% to 25%, and in some cases, 10%. Also, beginning in 2024, the pre-death required minimum distribution requirement for Roth 401(k) accounts will be eliminated.