Invest In The Future
On December 29, 2022, as part of the Consolidated Appropriations Act of 2023, President Biden signed the SECURE 2.0 Act of 2022 into law.
The law enacted numerous new retirement-related provisions with various effective dates. Many of the provisions are designed to encourage citizens to invest in their future. The law is very extensive and complex. Below is a snapshot of a few of the provisions.
- Required Minimum Distributions. The law requires when you reach a certain age, required minimum distributions (RMD) must be made from tax-sheltered accounts (IRA, 401(k)s) and, therefore, be subject to tax. The RMD age was raised to 73 in 2023 and 75 in 2033. So, if you turn 72 in 2023, you must take your first RMD by December 31, 2024, or you could delay it to no later than April 1, 2025. In addition, penalties for neglecting to take the RMD were cut in half beginning in 2023 and reduced further if promptly corrected. Also, starting in 2024, Roth accounts will be exempted from RMD requirements.
- Automatic Enrollment and Portability. Effective in 2025, almost all new retirement plans (401(k) and 403(b) plans) with employee deferral features must automatically enroll employees at a rate of at least 3%, but not more than 10%, contribution rate. Employees may choose not to participate. Companies in business for less than three years and employers with ten or fewer workers are exempted from this requirement. Plan service providers can also offer automatic portability services whereby an employee’s low-balance account can be transferred to a new plan.
- Catch-Up Provisions. Contribution catch-up provisions have increased for individual participants age 50 and older. The catch-up amount increased from $6,500 to $7,500 annually in 2023. In addition, in 2025, the catch-up contribution will increase to $10,000 annually (indexed for inflation) for participants ages 60 to 63. Beginning in 2024, all catch-up contributions for participants fifty and older earning over $145,000 the prior calendar year must be made on an after-tax basis in a Roth account.
- Part-Time Workers. Effective in 2025, eligibility to participate in defined contribution retirement plans changed under Secure Act 2.0 to include workers who attain 500 to 999 hours for two consecutive years.
- Student Loans. Effective 2024, student loan payments can be construed as employee retirement contributions to qualify for employer matching contributions. Accordingly, employees must certify annually to their employer the amount of their qualifying student loan payments.
- Retirement Plan Mandatory Cash-Out Limits. Effective in 2024, retirement accounts with balances of $7,000 or less for participants no longer employed by the sponsoring company can be paid out to the former employee. Previously, this amount was $5,000. The $7,000 amount is not indexed in future years.
- Emergency Savings. Beginning in 2024, defined contribution plans can make available a Roth-designated account eligible to accept emergency savings. Contributions would be limited to $2,500 annually, with the first four withdrawals a year distributed as tax-free and penalty-free. In addition, the contributions would be eligible for employer match if permitted under the plan’s terms.
- Self Correction. The number of infractions that can be self-corrected internally by a plan without submission to the IRS or DOL increased under the Act.
- Incentives to Participate. Effective in 2023, employers may offer modest incentives to increase participation in the retirement plan. However, the financial incentives must be de minimis and cannot be paid from plan assets.