The 2023 omnibus bill, named Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE Act), has been passed by Congress and signed into law by President Biden. The new law contains several significant changes to retirement plans, such as raising the age required to take mandatory distributions from tax-deferred retirement accounts, like IRAs.
The following are the key provisions in the bill related to retirement plans.
Modification of Credit for Small Employer Pension Plan Start-up Costs
The SECURE Act changes the small employer pension (SEP) plan start-up cost credit by increasing the credit for qualified start-up costs from 50% to 100% for employers with up to 50 employees. Employers with 51 to 100 employees will continue to be eligible for a small employer pension credit of 50% of qualified start-up costs.
The Act also corrects a technical glitch and now allows employers joining multiple employer plans (MEP) to take the portion of the SEP credit for qualified start-up costs for the first three years after they join an MEP, regardless of how long the MEP has been in existence. This rule change is effective retroactively for tax years beginning after December 31, 2019.
Expanding Automatic Enrollment in Retirement Plans
The SECURE Act adds a new provision to automatically enroll employees in many newly created 401(k) or 403(b) plans at between 3% and 10% of their pay. Automatic enrollment is not required for SIMPLE 401(k) plans; those plans established before the SECURE 2.0 Act is enacted; and any plan maintained by an employer with no more than 10 employees.
Increase in Age for Required Beginning Date for Mandatory Distributions
The new law raises the age for people to begin taking required minimum distributions (RMD) from their retirement accounts from 72 to 73, beginning Jan. 1, 2023. The age will raise again starting Jan. 1, 2033, to 75.
Higher Catch-up Limit to Apply at Age 60, 61, 62, and 63
Starting in 2023, the Act increases the current catch-up limit for workers 50 and older to contribute an extra $7,500 to retirement accounts. The bill will raise this catch-up amount to at least $11,250 a year for people 60 to 63 beginning in 2025.
Penalty-Free Withdrawals For Certain Emergency Expenses
The SECURE Act allows employees to save up to $2,500 in a Roth IRA account that can be used tax-free and penalty-free for emergencies if withdrawn before the age of 59 ½.
Starter 401(k) Plans For Employers With No Retirement Plan
The SECURE Act establishes a new Starter 401(k) plan for small businesses that currently do not offer retirement plans for employees. Eligible employees would be automatically enrolled at a minimum level of 3% of their compensation and no employer contribution would be required.
Improving Coverage For Part-Time Workers
The SECURE 2.0 Act allows part-time employees who have worked at least 500 hours per year for two years to participate in the employer’s 401(k) plan. This is a change from the current law which requires part-time workers to have worked for at least three years.
Reduction in Excise Tax on Certain Accumulations in Qualified Retirement Plans
Secure 2.0 Act reduces the penalty for failure to take RMD’s from any qualified retirement plan, including IRAs, from 50% to 25%. In addition, the new law states that if the failure to take the RMD is corrected in a timely manner, the penalty is reduced from 25% to 10%.
Surviving Spouse Election to be Treated as Employee
Under the Act, the surviving spouse of an employee who dies before he or she begins taking required minimum distributions from a retirement plan can e treated as an employee and not subject to the RMD rules.
Elective Deferrals Generally Limited to Regular Contribution Limit (Act Sec. 603)
The Act provides that catch-up contributions – additional pre-tax elective deferrals for participants who are 50 or older – are subject to mandatory Roth tax treatment, except those made by participants whose wages for the preceding calendar year do not exceed $145,000, as annually indexed for inflation.
Optional Treatment of Employer Matching or Nonelective Contributions as Roth Contributions
The SECURE 2.0 Act now permits participants to designate some or all matching contributions and nonelective contributions to employer-matching qualified retirement plants as designated Roth contributions. This applies only to the extent that a participant is fully vested in these contributions.
If you have any questions about these provisions, please contact your retirement plan administrator. If you do not have a retirement plan, please let us know and we can refer you to a retirement plan professional.