Nancy Pelosi famously said we needed to pass Obamacare legislation so we could find out what is in the bill. Well, the SECURE Act 2.0 has now been passed, but there are still a lot of details that need to be fleshed out, likely by the Treasury Department in the coming years. Here’s what we know so far:
The SECURE Act 2.0 was approved by Congress and signed by President Biden in late December 2022 and is now officially law as of January 1, 2023. It is an extension of the SECURE Act of 2019 which was intended to help strengthen the retirement system and ensure participants’ financial readiness for retirement.
Enrollment and Escalation
Starting January 1, 2025, all new 401(k) and 403(b) plans will be required to automatically enroll any new employees into the plan with a minimum salary deferral rate of 3%, but no more than 10%. Employers will also be required, through auto escalation, to increase the contribution rate for employees 1% annually until it reaches 10% of the employee’s salary.
This will not be a requirement for businesses with 10 or fewer employees and/or companies that have been in operation for less than three years. Employees can of course opt out of automatic enrollment at any time. The new law also permits plan sponsors automatic portability services to easily transfer participants’ low balance retirement accounts to their new plans when they change jobs.
Higher catch-up contributions
Starting January 1, 2025, individuals aged 60 through 63 will be able to make catch-up contributions up to $10,000 annually. This amount will be indexed to inflation. Those 50 or older can still make catch-up contributions of $7,500 annually.
Starting in 2025, any catch up contribution made by a participant who is 50 or over, if they earned $145,000 or more in the previous year, will be required to be made to a Roth designated account in after-tax dollars.
Required Minimum Distribution (RMD) Changes
Starting January 1, 2023, the RMD age increases to 73. Currently, individuals who are 72 and older must take an RMD from their qualified accounts. If a participant has already started taking RMDs, they will continue to do so.
Starting January 1, 2033, the RMD age will increase further to 75, if the law doesn’t change again.
Starting January 1, 2023, the penalty for failing to take an RMD will decrease from 50% to 25%.
Starting January 1, 2024, Roth accounts in employer sponsored retirement plans will be exempt from the RMD requirements.
Student Loan Payments
Starting January 1, 2024, individuals who are unable to save in their company-sponsored retirement accounts because they are paying student loans will be able to receive matching contributions from their employer. This will only apply to companies that offer matching contributions.
Starting January 1, 2024, participants in defined contribution retirement plans will be able to add an emergency savings account that is a designated Roth account and is eligible to accept participant contributions for non-highly compensated employees. Contributions would be limited to $2,500 annually and the first 4 withdrawals in a year would be tax and penalty free.
The new provisions that apply to individuals seem pretty clear, but there is still a lot of uncertainty around how the student loan and emergency savings provisions will be implemented. If you have questions, give us a call and we’ll try to add clarity where we can.
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