How The SECURE Act 2.0 Will Impact Your Retirement Plan
On December 29, 2022, the Consolidated Appropriations Act of 2023 was signed into law which included the highly anticipated Securing a Strong Retirement Act (commonly referred to as SECURE 2.0).
This new legislation builds upon the enhancements that were implemented under the SECURE Act of 2019, including over 90 provisions taken primarily from three draft House and Senate bills – (1) the Securing a Strong Retirement Act, (2) the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE Act) and (3) the Enhancing American Retirement Now (EARN Act).
The provisions included in this legislation will take effect in varying years giving plan sponsors and service providers more time to understand and implement changes to their plans and recordkeeping systems.
The following is a summary of selected provisions that are effective now.
- Modification of credit for small employer pension plan startup costs – Favorable changes have been made to increase tax credits for many employers establishing new plans.
- The startup credit will be increased from 50% to 100% for employers with up to 50 employees. The existing annual cap of $5,000 per year will be retained.
- An additional credit is also available for employer contributions made to newly established defined contribution plans
- For employers with up to 50 employees, the credit is 100% of the employer contributions made to each eligible employee (earning less than $100,000), limited to $1,000 per employee.
- For employers with 51-100 employees, the credit is reduced by 2% for each employee in excess of 50 employees, limited to $1,000 per employee.
- The credit amount in all cases is phased out over time as follows:
- Years 0-1 – 100% credit
- Year 2 – 75% credit
- Year 3 – 50% credit
- Year 4 – 25% credit
- Year 5 or later – 0% credit
- The above credits are available to employers that merge into another plan as a part of a Multiple Employer Plan (MEP).
- These tax credits are available in lieu of tax deductions, which in some cases may be more valuable.
- Raising the age for Required Minimum Distributions (RMDs) – The SECURE Act of 2019 increased the RMD age to 72. SECURE 2.0 will expand on this recent change and once again increase the RMD age to:
- Age 73 starting on January 1, 2023
- Age 75 starting on January 1, 2033
- Reduction in excise tax – The penalty for failure to take RMDs will be reduced from 50% to 25%. Further, if a failure to take an RMD from an IRA is corrected in a timely manner, the excise tax is further reduced from 25% to 10%.
- Optional treatment of employer matching or nonelective contributions as Roth Contributions – Under prior law, your plan was not permitted to provide employer contributions to your plan on a Roth basis. SECURE 2.0 allows defined contribution plans to provide participants with the option of receiving matching contributions and nonelective contributions on a Roth basis. We are awaiting further guidance and system updates to implement this new option.
- Employer may rely on an employee certifying that deemed hardship distribution conditions are met – Employees are permitted to self-certify that they have had an event that constitutes a hardship for purposes of taking a hardship withdrawal.
- Cash balance interest crediting rate – For cash balance plans that credit a variable rate of interest, the plan sponsor can assume an interest credit that is a “reasonable” rate of return, provided it does not exceed 6%. This clarification will allow plan sponsors to provide larger pay credits for older and long-tenured workers.
- Eliminating unnecessary plan requirements related to unenrolled participants – Your plan will no longer be required to provide certain intermittent ERISA or Internal Revenue Code notices to unenrolled participants who have elected not to participate. However, to further encourage participation of unenrolled participants, you are required to send (1) an annual reminder notice of the participant’s eligibility to participate in the plan and any applicable election deadlines, and (2) any otherwise required document requested by the participant at any time. This rule applies only with respect to an unenrolled participant who received the summary plan description in connection with initial eligibility under the plan and any other notices related to eligibility under the plan required to be furnished.
- Recovery of retirement plan overpayments – you will now have discretion over whether to recoup overpayments that were mistakenly made to retirees. If plan fiduciaries choose to recoup overpayments, certain limitations and protections apply. Rollovers of the overpayments also remain valid.
Overall, the goal of this new legislation is to make saving for retirement easier and more accessible while simultaneously tackling issues that may have prevented employees from actively participating in their workplace retirement plan.
Any plan amendments needed as a result of this new legislation must be adopted by December 31, 2025 (or December 31, 2027, for certain governmental and collectively bargained plans), unless an extension is provided by the Department of Labor (DOL) or the Internal Revenue Service (IRS).
Alliance will be providing more information around SECURE 2.0 in the coming weeks.