The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was a significant stride in altering the retirement landscape. The journey continues with SECURE 2.0, which encompasses further changes aimed at enhancing retirement savings and security for Americans. We’re going to break down the key provisions of SECURE 2.0, delving into how they could impact individuals and employers alike.
Key Provisions of SECURE 2.0:
- Required Minimum Distributions (RMDs): Feel young at 72? SECURE 2.0 agrees! The start age for those RMDs is shifting from 72 to 73 in 2023, and it’ll make its way up to 75 by 2033. Roth RMD requirements are also being altered so that participants will no longer need to roll their Roth plan balance into a Roth IRA to avoid RMD requirements. There will be no RMD requirements on either Roth IRAs or Roth Plans, effective January, 1st, 2024.
- Catch-Up Contributions: SECURE 2.0 augments the size of catch-up contributions for older workers within workplace plans. COLA indexing will be added to the $1,000 IRA catch-up contribution limit for individuals aged 50 or older. After 2023, catch-up contributions must be Roth for participants earning over $145,000 in the prior year.
- Automatic Enrollment: For employers, it’s time to set it and (almost) forget it. From the first plan year after December 31st, 2024, auto-enrollment is in the house. This means employees will be auto-enrolled into their company’s retirement plan, starting with a 3% – 10% contribution, and that rate will be nudged up till it’s between 10% – 15%. And where does this money go? Straight into the QDIA party fund! These changes will apply to all new plans after December 29th, 2022 to be effective by 2025.
- Tax Credits for Small Employers: Small employers adopting their first plan by joining an existing Multiple Employer Plan (MEP) can now avail a start-up credit. Think of it like a welcome gift! SECURE 2.0 will also permit open 403(b) MEPs/PEPs and extend the “one-bad-apple rule” relief to 403(b) MEPs beginning the first plan year after December 31st, 2022.
- Natural Disaster Provisions: SECURE 2.0 has your back during rough weather – literally. No more waiting for the IRS or Congress to give the green light for accessing retirement funds during qualified disasters because now there are permanent rules set in place for disasters after January 26th, 2021.
- Terminal Illness Distributions: Starting December 29th, 2022, if you’re facing a terminal illness, you can access your funds without the usual 10% early withdrawal penalty. Just provide proof from your clinician, and if you want, you can repay the withdrawal within three years.
- Domestic Abuse Distributions: Beginning January 1st, 2024, a plan may allow for distributions of up to $10,000 or 50% of the participant’s account balance if the participant is a victim of domestic abuse. The distribution must be taken within 12 months of the abuse, and the 10% early withdrawal fee will not be applied.
- Increased force-out limit: Plan sponsors have the option to include a provision in their plans that allows them to disburse small, vested benefit amounts up to the legally mandated limit. These distributions can be made without the consent of the participant or their spouse and are paid before the participant’s annuity starting date. The statutory limit for mandatory cash-outs has been raised from $5,000 to $7,000 for distributions made after December 31st, 2023. Adopting this higher limit is optional for plan sponsors.
- Emergency Savings Accounts: Sponsors of 401(k), 403(b), and governmental 457(b) plans can now offer pensions-linked emergency savings accounts (PLESAs) after December 31st, 2023. If opted-in, employees would contribute to these accounts on a Roth basis and could make withdrawals as frequently as once a month.
- Matching College Loan Payments: Beginning after December 31st, 2023, employers can make matching contributions to their employees’ qualified student loan payments as if they were pretax, Roth, or after-tax contributions. These contributions are only eligible for higher-education loans.
With 92 distinct provisions spanning 358 pages, it would be impossible for us to cover all of them in one go (and probably pretty boring for you to read!). That’s why we’ve linked some additional articles below if you’re interested in really diving deep into the word of SECURE 2.0.
SECURE 2.0 is here to put some pep in your retirement step, benefiting both individuals and bosses. Get to know these updates, and you’ll waltz through your retirement planning like a pro. And remember, for the full 411 on SECURE 2.0, it’s always a good idea to have a chat with the financial experts. Don’t hesitate to reach out with your questions!
Additional Reading
Sources:
SECURE 2.0: Mandatory cash-out limit increases in 2024
SECURE 2.0 offers new alternative for in-plan emergency savings
SECURE 2.0’s student loan match 101
The SECURE Act 2.0: New And Expanded Distribution Rules And Events