SECURE 2.0 Act Is Now the Law of the Land

In one of its final acts of 2022, Congress approved a massive year-end spending bill that includes the long-anticipated retirement savings package known as SECURE 2.0 Act of 2022 ("SECURE 2.0 Act").  

The retirement provisions were included in the 4,155-page bill that funds every federal agency and government program through September 30, 2023. The bill was cleared by the House on December 23, one day after the Senate voted for it. President Biden signed the bill into law on December 29.

The SECURE 2.0 Act provisions were the result of months of negotiations between House and Senate leaders to combine three different retirement-focused bills that enjoyed bipartisan support across both chambers. It builds on the SECURE Act, which was approved by Congress in 2019.

Changes to employer-sponsored plans

At the heart of the legislation are dozens of changes to employer-sponsored plans, which are intended to encourage companies to start new plans, strengthen existing plans, and bolster participation by employees. 

Among the most notable plan changes is the arrival of long-debated mandatory automatic enrollment and automatic escalation requirements. Beginning in 2025, new 401(k) and 403(b) plans will have to automatically enroll participants with a minimum salary deferral of 3% but not more than 10%. Employees would see their deferral escalate by 1% a year up to a minimum of 10% and a maximum of 15% of their salary. Plans in existence prior to the new law passing are exempt. Also exempted are companies with 10 or fewer employees and new employers that have been in existence for less than three years. Governmental and church plans are also exempt. House Ways & Means Committee Chairman Richard Neal (D-MA) has long been an advocate of automatic enrollment and championed the concept throughout 2022's negotiations.

The SECURE 2.0 Act also reduces the amount of time a long-term part-time employee must work before becoming eligible for the company plan. Employees must work at least 500 hours in two consecutive years, down from three years.

The law also creates a "Starter 401(k)" plan that simplifies the requirements for a small company to launch a plan and expands the tax incentives for companies that start a plan. 

To encourage lower-income individuals to save for retirement, the new law enhances the Saver's Credit. The bill turns that into a "Saver's Match," where the federal government would match contributions directly into an individual's retirement account or workplace retirement account.

In addition, beginning this year, employers may provide a de minimis financial incentive to encourage employees to participate in the company plan. The incentive, such as a low-dollar gift card, cannot be paid for with plan assets. Regulations will be needed to define this provision more clearly, as the new law does not spell out the details.

Beginning in 2024, employers have the option to "match" qualified student loan payments with a contribution to the employee's retirement plan account. The goal is to help workers who are burdened by student loans and can't afford to contribute to their retirement plan by ensuring that they are accumulating some retirement savings even as they pay down their loan.

New provisions for employees

Employers will now have the option to allow employees to create "rainy-day funds" in their retirement plan. Individuals would then be able withdraw up to $1,000 from the plan penalty-free for certain emergencies. The provision addresses a concern that spiked during the pandemic, when employers saw a big increase in the number of employees who were tapping their retirement accounts to cover unexpected expenses.

In addition to the emergency savings withdrawal, the legislation further expands the list of opportunities for employees to withdraw money from their retirement account for extraordinary circumstances. 

• Victims of domestic abuse can withdraw up to $10,000 penalty-free from their retirement plan account.
• Individuals can withdraw up to $22,000 from an employer-sponsored plan or an IRA for federally declared disasters.
• Individuals can roll up to $35,000 from a 529 to a Roth IRA in the name of the student beneficiary. The 529 account must have been in existence for at least 15 years. That provision becomes effective in 2024. 

Among the key provisions for individual savers is an increase in the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account to 73 from 72, beginning January 1, 2023. In 2033, the RMD age will increase again, to 75. And RMDs will be eliminated completely for Roth 401(k) accounts beginning in 2024.

Penalties for missing or underestimating RMDs will be reduced under the new law. Failure to take the proper RMD from a retirement plan used to carry with it a penalty of 50% of the shortfall. Beginning this year, the penalty is reduced to 25% and can be further reduced to 10% if the individual corrects the issue within two years.

The bill also increases catch-up contributions for individuals ages 60 through 63, beginning in 2025. Individuals who qualify could contribute an additional 50% of the regular catch-up contribution limit, which kicks in at age 50. If the provision were in place for 2023, that would mean a 62-year-old could contribute the maximum to his company's 401(k) plan of $22,500, plus a catch-up contribution of $7,500, plus an additional 50% of that catch-up contribution, or $3,750—for a total of $33,750. That amount is likely to rise a bit by the time the new rules take effect in 2025, since the contribution amounts are adjusted annually for inflation. Starting in 2024, catch-up contributions made by any employee earning more than $145,000 must be made on a Roth basis.

One other notable provision is the creation of a "retirement savings lost and found" national database that would help individuals find their benefits if they changed jobs, or if the company they worked for moved, changed its name, or merged with a different company. The Labor and Treasury departments are directed to work together to have the database operational within two years.

This is not an exhaustive list

Not all of the new law's provisions are discussed here nor are all specific details included for those provisions that are discussed. Plan sponsors, recordkeepers, and other retirement savings professionals should carefully review the new law to determine additional potential effects on workplace retirement plans. Further, it should be noted that regulatory agencies such as the Internal Revenue Service and Department of Labor are expected to issue guidance over the next several months and years describing the implementation of these SECURE 2.0 Act provisions. As such, plan sponsors may want to wait until such guidance is issued before making plan design changes and are encouraged to discuss with their legal counsel prior to making decisions. 

Finally, separate from the SECURE 2.0 legislation, the IRS announced last fall that the 2023 contribution limit for employer-sponsored plans would be raised to $22,500, with an additional $7,500 in catch-up contributions for employees 50 and over. That is the largest increase to the contribution limit ever, a result of 2022's sky-high inflation.