On December 29, 2022, SECURE Act 2.0 was signed into law as part of the Consolidated Appropriations Act. The new law includes additional retirement-focused provisions that build off of the original SECURE Act which was passed in late 2019. SECURE Act 2.0 further expands and improves opportunities for Americans to become more retirement ready.
The new law contains numerous provisions, but our Retirement Plan Solutions team at BerganKDV has broken down a few key changes that employees and employers should be aware of. Here are a few highlights of the new law that may impact your retirement planning:
- Mandatory Auto Enrollment/ Escalation. Under SECURE Act 2.0, employers that start a new retirement plan will need to offer contribution plans that automatically enroll eligible new hires at an initial pretax contribution level of at least 3%, up to 10% of pay. If an initial rate of less than 10% is elected, the contribution rate will need to increase annually by 1% each year until 10% of pay is reached as part of an automatic escalation program. Employees now have the opportunity to elect different contribution levels on an individual basis. These changes are once again, only applied to new retirement plans created after the law’s passing and all current plans would be grandfathered into the existing plan design without the requirement to adopt the auto provisions at this time. There are exemptions to the requirements for church and governmental plans, businesses with less than 10 team members, and businesses that have been established for less than three years.
- Student Loan Contribution Matching. SECURE Act 2.0 authorizes the ability for employers to make 401(k) matching contributions to the plan based on an employee’s student loan payments, without requiring impacted employees to defer into the plan. The matching contributions for student loan payments are subject to the same vesting schedule as other matching contributions of the employer. This provision is a wonderful opportunity for employers to ensure that their plan is not just benefiting those with higher earnings and helps younger demographics avoid the detrimental financial choice of paying past debts at the expense of contributing to their retirement account and missing out on employer contribution opportunities.
- Increase Catch-Up Contributions. The new law increases the annual catch-up amount to $10,000 for plan participants ages 62-64 starting in 2024 and the limit would adjust for inflation. SECURE Act 2.0 does not change the existing catch-up contribution limit available to those aged 50 or older. Currently, the 2023 limit on catch-up contributions for employees age 50 or older is an additional $7,500, for a total contribution limit of $30,000, indexed annually for inflation. This rate increase benefits older workers and allows them to make larger contributions than before at a critical pre-retirement stage.
- Launch a Retirement Savings Lost and Found. SECURE Act 2.0 establishes a database within the Department of Labor where employees and retirees can locate previous plans from former employers more easily.
- Small Business Tax Credit. The new law also creates a tax credit that encourages small businesses to offer a retirement savings plan (continuation of the first SECURE Act). There is a new credit that encourages small employers to make direct contributions to their 401(k) plan for their employees, offsetting up to $1,000 of these employer contributions for each participating employee. This is a fantastic opportunity for small businesses to promote the importance of retirement savings while helping their bottom line. Additionally, there is a tax credit that can help cover 100% of the costs for small employers to implement a startup 401(k) Plan for the first three years of the plan. There has never been a better time than now to start a 401(k) plan.
- Require Minimum Distribution (RMD) Age change from 72 to 75. SECURE Act 2.0 changes the RMD age from 72 to 75 by the year 2032, and individuals with an account balance of $100,000 or less in aggregate retirement savings would have RMDs waived completely. The Age increase is subject to change, but currently will be the following: 73 in the year 2023, 74 in 2030 and 75 in 2032. Additionally, the legislative change would reduce penalties for failing to take an RMD from 50% down to 25%.
SECURE Act 2.0 recognizes the reality that many Americans are not saving enough for retirement. On average, most Americans are saving around 8.5% of their income toward retirement when it should be around 10-15%. The new law takes a parental approach to ensure employees have the chance to contribute a suitable amount for their future and encourages employers to make it as simple as possible to do just that.
We recommend that you reach out to your trusted advisor if they have not reached out to you already, to discuss how SECURE Act 2.0 may impact your retirement savings and tax planning strategies.
At BerganKDV, we help plan sponsors stay aware of new legislation and how to navigate when new laws take effect. It is our goal to ensure plan sponsors and their employees are set for success in staying compliant with new legislation and in adopting advantageous provisions. If you have additional questions about the provisions included in SECURE Act 2.0, we would be happy to help. Contact us today and one of our team members will assist you.
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