On December 29, 2022, President Biden signed the Secure Act 2.0 into law. It aims to build on changes made by the Setting Every Community Up for Retirement Enhancement Act of 2019, originally dubbed the Secure Act. The Act held bipartisan support as it made its way to the President’s desk.
Secure Act 2.0 allows employees to save more for retirement while leaving these savings untouched and untaxed for longer.The Act also created a more accessible opportunity for employers to sponsor retirement plans for their employees.
“Secure Act 2.0 has drastically altered the retirement plan landscape,” says Margaret Michael, Senior Manager at Clearview Group. “While these changes provide greater flexibility to employers, there is now an even greater risk of employee benefit plans being non-compliant.”
The significant changes brought by Secure Act 2.0 are a response to the aging U.S. population and the shift of responsibility for retirement savings from employers to their employees.
The most notable changes, now finalized, include postponing the required minimum distribution (RMD) age, requiring automatic enrollment, providing an opportunity for additional catch-up contributions, allowing flexibility for emergencies, and benefits to making student loan payments. Some provisions are effective immediately, while others are effective in future years.
Secure Act 2 raised the age from 72 to 73 after January 1, 2023, and further to 75 starting on January 1, 2033. The RMD recently increased from 70.5 to 72 in 2019 with the original Secure Act. This change ensures that individuals will spend some part of their retirement savings during their lifetime.
Starting in 2025, any new 401(K) or 403(b) plans will have automatic enrollment at between 3% to 10% of the individual’s pay. This rate will increase by 1% yearly with a maximum cap of 15%. The goal of this provision is to expand retirement plan participation.
With the start of 2023, employees 50 or older can make catch-up contributions of an extra $7,500 per year to 401(K) accounts. Starting in 2025, Secure Act will raise the catch-up amount to at least $11,250 per year for employees between the ages of 60 to 63.
The legislation allows employees to save up to $2,500 in an emergency savings account with an additional employer match, and the contribution would be invested into retirement savings. If the emergency funds need to be accessed, the employee can withdraw that money free of taxes.
Secure Act 2.0 also provides penalty-free withdraws for individuals who are terminally ill, have experienced domestic abuse, or require payment of certain long-term-care insurance premiums. Individuals affected by federally declared disasters may also make penalty-free withdraws up to $22,000 with the option to pay the income tax over three years or repay the sum.
The goal of these changes is to encourage employees to take advantage of retirement savings while still allowing an opportunity for flexibility and other financial goals.
With its passing, Secure Act 2.0 offers the option for employers to treat qualified student loan payments as elective deferrals for matching contributions. The finalized law defines “qualified student loan payments.”
To participate, employees must provide annual certification of the number of student loans repaid. This provision is effective for plan years starting after December 31, 2023, and applies to 401(K), 403(b), 457(b) governmental, and SIMPLE IRA plans.
Now that the changes of Secure Act 2.0 are final, organizations must consider how they affect their employee benefit plans. If your organization needs help understanding the changes made by Secure Act 2.0 or needs an employee benefit plan audit, contact Margaret Michael.
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