The Securing a Strong Retirement Act, dubbed SECURE 2.0 as a follow-up to the SECURE Act of 2019 legislation, was signed into law in late 2022. The law makes it easier for retirement plan participants to save for retirement and for plan sponsors to offer retirement plans and enroll participants.
We’ve summarized a few provisions of SECURE 2.0 that are likely to be the most impactful for plan sponsors. While most of the SECURE 2.0 Act provisions aren’t effective until Jan. 1, 2024, or later, some are effective immediately. Now is the time to familiarize yourself with the changes and update your plan and processes.
Automatic enrollment now mandatory for new 401(k) and 403(b) plans
Beginning in 2025, employers who start new 401(k) or 403(b) plans after Dec. 29, 2022, must automatically enroll new hires at a savings rate of at least 3 percent of pay. In addition, these plan sponsors must automatically increase the employee’s savings rate by at least 1 percent every year, up to at least 10 percent (not to exceed 15 percent). Employees may opt out of automatic enrollment.
What this means for plan sponsors: If you currently offer a defined benefit plan, SECURE 2.0 doesn’t require you to add an automatic enrollment feature. Companies in business for less than three years and businesses with 10 or fewer workers are also exempt from this requirement.
Matching contributions on student loan payments
Beginning in 2024, employers will have the option to offer matching contributions in a workplace retirement account for student loan payments, even if the employees aren’t contributing to the plan.
In essence, this allows employers to contribute to the plan on behalf of employees who prioritize repaying student loans over retirement savings, helping these employees start saving sooner or save more for retirement.
Employers may rely on an employee to certify the amount of their qualifying student loan payments annually.
What this means for plan sponsors: Providing matching contributions based on student loan payments is optional for employers. Consider your employees’ participation and retirement savings behaviors before deciding whether to offer student loan payment-matching contributions.
Expanded eligibility for long-term, part-time employees
Under existing law, part-time workers qualify to participate in employer-sponsored plans once they’ve worked at least 500 hours for three consecutive years.
Beginning in 2025, part-time employees will qualify to participate in employer-sponsored plans once they’ve worked at least 500 hours for two consecutive years.
This doesn’t apply to employees participating in collectively bargained plans or nonresident aliens.
What this means for plan sponsors: Employers should start tracking hours for part-time employees to determine whether they will be eligible in 2024 or 2025 under this provision.
Limited repayment period for birth and adoption withdrawals
The SECURE Act of 2019 created a new exception to the 10 percent early withdrawal penalty for retirement plan distributions used for childbirth or adoption expenses, up to $5,000. Employees must take the withdrawal during the 12-month period beginning on the date the child is born or legally adopted. This change was effective for distributions made after Dec. 31, 2019.
The 2019 legislation also provided that those distributions could be repaid to an IRA or other retirement plan, allowing the participant to obtain a refund for taxes paid on those distributions.
SECURE 2.0 limits the repayment period for these distributions to three years beginning on the distribution date. This limitation recognizes that getting a refund for taxes paid on distributions is generally impossible after the three-year statute of limitations that applies to federal income tax refunds.
What this means for plan sponsors: Employers aren’t required to allow early withdrawals for births and adoptions. However, if you decide to add this to your plan, it will require a plan amendment.
Changes to catch-up contributions
Starting in 2025, participants ages 60 through 63 can contribute the greater of $10,000 or 150 percent of the standard catch-up amount in effect for the taxable year to their 401(k) or 403(b) plan. However, all catch-up contributions by workers making more than $145,000 must be Roth (i.e., made with after-tax dollars) starting in 2024. Once effective, the $10,000 and $145,000 amounts will be indexed for inflation.
Employees earning less than that threshold can still contribute catch-up contributions on a pre-tax basis.
What this means for plan sponsors: This provision is mandatory and requires a plan amendment. If your plan doesn’t currently allow for Roth contributions, consider offering a Roth option so participants earning over $145,000 per year and making catch-up contributions can keep making them, and newly eligible participants can start.
Emergency savings account
Beginning in 2024, employers can provide employees two ways to access funds in an emergency.
First, employers can offer participants an emergency savings withdrawal of up to $1,000 annually. This withdrawal isn’t subject to an early withdrawal penalty. Participants may repay the withdrawal over three years to get a refund of any federal income tax paid on the withdrawal.
Second, in addition to or instead of the emergency savings withdrawal, employers can offer non-highly compensated participants an emergency savings account as a “sidecar” account of their retirement plan. Employees can contribute voluntarily or employers can automatically enroll them at up to 3 percent of their annual pay (capped at $2,500). Withdrawals from the account are penalty-free.
Employee contributions to the emergency savings account are eligible for the same matching contributions that apply to elective deferrals. However, employers must make those matching contributions to the retirement accounts—not a savings account.
What this means for plan sponsors: Adding the “sidecar” emergency savings account to your retirement plan will require a plan amendment because the account is a new destination for contributions.
Incorporate SECURE 2.0 Provisions to Stay Compliant
With over 90 provisions in SECURE 2.0, the changes to defined benefit plans are extensive. Now is the time to work with your advisors to determine which new retirement plan rules apply to your plan.
While your legal counsel can assist with amending your plan, reach out to your Windham Brannon advisor for help determining how these changes will impact your tax and retirement situations, or contact Anne Morris for more information.
