SECURE ACT 2.0
The Secure Act 2.0 legislation was signed into law on December 29, 2022, as an enhanced version of retirement plan law changes which began with the original Secure Act back in 2019. Every employer who currently sponsors a “qualified retirement plan,” or is considering starting a plan, should consult with an expert who can advise them of the many attractive options contained in Secure Act 2.0—-which contains nearly 100 separate provisions regarding retirement plans. This PayDay will summarize many of the provisions contained in The Secure Act 2.0, but advice from TPA’s and retirement plan consultants is needed to truly understand new plan options available to both the employer and employees.
WHAT IS THE PURPOSE OF THE SECURE ACT 2.0?
Studies indicate that only about ½ of Americans are currently saving for retirement. The Secure Act 2.0 contains provisions which incentivize and encourage employees to save for retirement via employer-sponsored retirement plans. The Act also provides incentives in the form of tax credits to small employers to adopt a qualified retirement plan. Additionally, the law mandates that plans established after 12/29/22 (date of enactment of the Act) include automatic enrollment of new employees into the employer’s retirement plan—-so the Act provides both optional incentives to employers and employees to provide a structure for retirement savings and also changes automatic enrollment from an employer option to a legal requirement starting in year 2025.
WHAT PROVISIONS OF THE SECURE ACT 2.0 ARE EFFECTIVE IN 2023?
Secure Act 2.0 provides increased tax credits to employers who adopt new qualified plans for the first time. These tax credits are of 2 types, one being an increase in the current tax credit amount for expenses paid by an employer to setup and/or administer a new plan, and a brand new tax credit for employers who match employee contributions. Both credit types have maximums as to both credit amounts and the time in which the credits are available. FOR MANY EMPLOYERS WITH 50 OR FEWER EMPLOYEES WHO ADOPT A QUALIFIED PLAN FOR THE VERY FIRST TIME, THE TAX CREDITS WILL PAY FOR ALL ADMINISTRATIVE COSTS FOR THE FIRST FEW YEARS OF PLAN OPERATION PLUS A PORTION OF THE EMPLOYER’S MATCHING CONTRIBUTIONS ON BEHALF OF THEIR EMPLOYEES.
Effective for plan years beginning in 2023, both Simple-IRA and SEP plans will be permitted to provide Roth funding options to their employees. Prior to The Secure Act 2.0, neither Simple-IRA or SEP plans were eligible to provide Roth benefits to their employees. Employers who currently have Simple or SEP plans will need to wait for their plan sponsors to amend their retirement plans to offer Roth funding.
An interesting provision effective this year is an option for an employer to amend their retirement plan to enable employees to elect to have some or all of the employer matching funds to be directed to their Roth retirement account. Previously, all employer matching 401k/403b/457b plan contributions went into the plan’s “non-Roth” employee accounts, even for those employees who contributed funds into Roth accounts. An interesting “side-note” to this employee election is that the employee will need to pay income tax, out of pocket, on the employer’s matching funds which the employee elects to go into their Roth account. Roth funding is always taxed “up front” for income tax purposes, but is never again taxed when distributed. This provision, if adopted by employers as an option in their retirement plan, will be a bit more complex than traditional non-Roth employer matching contributions
WHAT PROVISIONS OF THE SECURE ACT 2.0 ARE EFFECTIVE IN 2024/NEXT YEAR?
Congress was concerned that employees with student loans would find it difficult to repay their student loans as well as contributing to retirement plans. Effective in 2024, employers will have a plan option in which they match employees’ repayments of student loans. The employer-matches of student loan repayments will depend upon a “self-certification” of student loan repayments by the employee and the employer matches of student loan repayments will fund the employee’s retirement account with the plan sponsor.
Congress also identified that employees who did not have any emergency savings have been reluctant to fund their retirement accounts. As such, an employer/employee option effective in 2024 will permit an employee to designate up to $2,500 of “elective deferrals/employee contributions” to an “emergency savings account” in which the employee can access for emergency cash. With the employee having an emergency fund in place, perhaps they would be more comfortable contributing to their retirement account. Also, the employer will “match” the employee funding of their emergency savings account with funds going into the employee’s retirement account.
Also effective in 2024 is a requirement/mandate that any employee “catch-up contributions” to their retirement account (age 50 or more) must be made to their Roth account (which means currently income taxed) IF the employee’s annual income exceeds $145,000. This mandatory provision will actually create more current year tax revenues for the government since Roth funding is “after-tax.”
WHAT PROVISIONS OF THE SECURE ACT 2.0 ARE EFFECTIVE IN 2025?
Beginning in year 2025, employees who are ages 60-64 can increase their “age-based catchup contributions” to a qualified retirement account from the current level of $7,500 (401k/403b) to $10,000, to help those older Americans “catch up” with retirement funding. The $10,000 catchup amount will be indexed to inflation for future years.
Also effective in 2025 is a requirement (not an option) that plans started after 12/29/2022 must automatically enroll new employees in the Company retirement plan, via automatic deductions from the new employee’s pay. The new employee does have the right to terminate their enrollment in the plan and also to recoup their previous automatic contributions to the plan, without penalty, during their first 90 days in the plan.
OTHER PROVISIONS NOT IMPACTING PAYROLL
The Secure Act 2.0 made numerous changes to the “required minimum distribution” (RMD) rules pertaining to when a person must begin taking distributions from their retirement accounts. Americans aged 72 and more should discuss new RMD rules with their financial planner.
A brand new provision is an opportunity to “roll-over” excess funds remaining in older 529 plans into Roth accounts for the 529 beneficiary. Again, financial planners will undoubtedly strategize for maximum value to be attained from transferring funds from 529 education accounts into Roth retirement plan accounts
IN SUMMARY
The Secure Act 2.0 provisions contain many opportunities and perhaps some obstacles as employers learn about the new law and make wise choices among many new options available to them and their employees regarding saving for retirement. Retirement plan laws and plan documents have always been complex and The Secure Act 2.0 makes them yet more so—while also providing some interesting retirement plan options for both employers and employees alike. More than ever before, employers of all sizes need to work with retirement plan experts who will help them choose the plan document which best meets the objectives of the employer and their employees’ concerns. Buying a 401k/403b plan “out of a box, 1 size fits all” is not a wise financial decision!!
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.
