Whether you are a working employee, someone in their retirement or an employer/plan sponsor, the SECURE 2.0 Act of 2022 has something for everyone. It was included as part of the Consolidated Appropriations Act, 2023, which was passed by Congress on December 23, 2022 and signed into law by President Biden on December 29, 2022. While there is something for everyone, we will focus on the areas in which it affects employers. Some items are effective this year while others will phase in over the next couple of years, but it may be a good idea to start planning today.
Increased Catch-up contributions for older employees
Catch-up contribution limits will increase as the participant ages. For 2023, the maximum catch-up contribution limit is $7,500 for 401(k)/403(b) plans. For 2024, that amount may be adjusted for inflation. Starting in 2025, the maximum catch-up contribution for participants who are 60-63 during the tax year will be allowed the greater of $10,000 or 150% of the regular catch-up contribution for 2024. Catch-up contributions for other types of retirement plans will also follow this pattern of increased age-based amounts.
Catch-up contributions for highly compensated employees
Starting in 2024, catch-up contributions for participants earning $145,000 or more in the previous calendar year must be made as Roth contributions. The wage amount will be adjusted for inflation each year.
Student loan payments made by employee are eligible for matching
The title says it all. Starting in 2024, employers will be able to contribute a matching contribution to the employee’s retirement plan based on an employee-made student loan payment. This will give employees an incentive to pay off their student loan debt.
Employer contributions allowed as Roth
Up until now, all employer contributions to retirement plans have been pre-tax contributions; meaning the employee did not pay any tax on the employer contribution, therefore they must pay taxes when it comes time for them to withdraw the funds. Effective immediately, employers may permit employees to elect that their employer-matching and non-elective contributions be made as Roth contributions. The employer contribution would be included in the taxable income to the employee at the time of the contribution, which would allow the employee to not have to pay taxes upon distribution. Employees must be 100% vested in the Roth contributions at the time of funding.
Automatic employee enrollment
While automatic enrollment has been around as a means for employers to encourage retirement savings, it has been voluntary on the part of the employer. For plans beginning in 2025 onward, the plan must contain an automatic enrollment provision with an automatic escalation provision each year. The plan must be automatically enrolled at a percentage of no less than 3%, but not greater than 10%, with an escalation that increases by 1% each year until the employee reaches at least 10%, but not more than 15%. If you are considering a plan and do not want to have an automatic provision, then be sure you start your plan in 2023 or 2024.
Long-term part-time employees can participate
Currently, plans are allowed to exclude part-time employees who have not completed a year of service with at least 1,000 hours. Effective January 1, 2025, employees with at least 500 hours of service, in two consecutive years, will be allowed to participate in a plan. The employer is not required to make matching contributions on their behalf.
Cashing out non-current participating employees
Effective January 1, 2024, a plan may cash out a former participant without their consent. For a former employee with a plan balance of $1,000 or under, a distribution can be made directly to the participant. For balances between $1,000 and $7,000, the distribution would be rolled into an IRA established for the participant, unless they consent to a distribution.
Emergency Savings Account (ESA) provision
Employers can allow an ESA provision for non-highly compensated employees, which must be funded with Roth contributions. Automatic enrollment can be allowed to an ESA at 3%, and no employer contribution is permitted. The maximum balance in an ESA is $2,500, which will be indexed for inflation, but can be set to a lesser limit by the employer. Any excess contributions over the limit can be directed to the employee’s Roth plan. Employees will be allowed to withdraw from the plan once per month, penalty-free, as well as free from any fees (subject to a limit of four free per year), and they do not need to document an emergency. Upon separation of employment, any ESA balance would be converted to a Roth plan, or can be disbursed to the employee.
Elimination of notice requirement for non-participating employees
Plan sponsors will be required to send unenrolled employees the Summary Plan Description (SPD) and an annual notice, regarding their eligibility to unenroll, and any election deadlines. The sponsor must also provide any plan documents requested by the unenrolled employee, as if they were participants.
Tax credit for new plan start-up costs
Effective January 1, 2023 , eligible employer plans may qualify for a tax credit of 100% of a new plan startup costs for plans with 50 or fewer employees, up to $5,000.
Tax credit for employer contributions on new plans
Also effective starting in 2023, a small employer with 50 employees or fewer would be allowed a credit for 100% of the employer contribution in the year the plan is established. Each following year, the credit would decrease by 25% until the credit is reduced to zero in the 5th year. There is a phased out credit available for employers with 51 to 100 employees, and no credit is allowed on the employer contributions to an employee who earns more than $100,000 annually, which will be adjusted for inflation.
The SECURE 2.0 Act contains far more than the above, in content and details. In fact, 92 provisions total. Plan sponsors/employers should assess the impact of these changes of their plan, and any plan they are looking to implement in the near future, with their financial advisor. Many of these points will even require amendments to existing plans. Right now, time is on your side.
While I make every attempt to ensure the accuracy and reliability of the information provided in this article, the information is provided “as-is” without warranty of any kind. They may be additional situations that apply to you that are not mentioned above. PayMaster, Inc and Romeo Chicco do not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained. Consult with your CPA, Labor Attorney, Financial Advisor and/or HR Professional to ensure you are in compliance.