SECURE 2.0, the new retirement law passed in December 2022, levels the playing field for employers and employees when it comes to the accessibility and affordability of retirement plans. An update to the SECURE Act of 2019, the legislation is one of the most significant reforms to retirement law in recent history.
Highlights of the new law include:
Small Employer Credit
To incentivize more small businesses to provide a retirement plan, the new law increases the credit available to small employers for plan startup costs. Employers with 50 employees or less can now receive:
- A 100% credit for qualified startup costs in taxable years after Dec. 31, 2022;
- Additional credit for up to five years, capped at $1,000 per employee.
This credit is phased out for employers with 51-100 employees.
Starter Retirement Plans
Employers that do not currently sponsor a retirement plan will have two new plan designs to choose from. The “starter” 401(k) and “safe harbor” 403(b) plans (effective for plan years beginning after 2023) allow only employee deferrals and limit contributions to no more than the IRA contribution limits.
Automatic Enrollment
SECURE 2.0 requires most employers with 401(k) or 403(b) plans to automatically enroll new, eligible employees at a 3% contribution rate and increase the contribution 1% annually until it reaches at least 10% (but no more than 15%).
Coverage of Long-Term, Part-Time Employees
Effective Jan. 1, 2025, more “long-term, part-time” employees will be eligible to make elective deferral contributions to a 401(k) plan. The new law will require employers to include employees who have provided at least 500 hours of service within a plan year for two consecutive years (formerly three years).
Student Loan Assistance
For employees whose student loans are preventing them from saving for retirement, SECURE 2.0 allows employers to match student loan payments (up to a certain percentage of the employee’s salary) and deposit the funds in their retirement account, beginning in 2024.
Converting SIMPLE IRAs
Under the new law, certain employers may elect to replace a SIMPLE IRA with a safe harbor 401(k) at any time. In addition, employers are no longer subject to the two-year rollover limitation when converting a SIMPLE IRA to a 401(k) or 403(b).
Employee Incentives
Employers may now offer employees small immediate incentives (e.g., gift card or cash) as an incentive to enroll in the retirement plan, as long as these incentives are not paid with plan assets.
Mandatory Distributions
Plan participants can now save more for retirement by keeping funds in their retirement plans longer. The act increases the age for required minimum distributions (RMDs) to age 73 in 2023 and age 75 in 2033.
Catch-Up Limits
Taxpayers between the ages of 60 and 63 will be able to make higher “catch-up contributions” to their retirement plans beginning in 2025. For 401(k), 403(b) and other non-SIMPLE plans, the 2025 catch-up limit will be the greater of $10,000 or 150% of the 2024 catch-up amount. For SIMPLE plans, the limit for catch-up contributions is the greater of $5,000 or 150% of the 2025 catch-up amount. The new law also allows these increased limits to be adjusted for inflation each year.
Hardship Withdrawals
Under SECURE 2.0, participants are allowed to withdraw up to $22,000 (penalty-free) to pay for expenses related to a natural disaster. The withdrawal would be taxed as gross income over three years. The legislation also allows penalty-free withdrawals for survivors of domestic abuse (the lesser of $10,000 or 50% of the retirement account) and for “emergency withdrawal” loans up to $1,000 every three years.
Roth Treatment of Contributions
SECURE 2.0 allows a defined contribution plan to allow participants to treat employer matches as Roth contributions, including those matched to student loan payments.
Reduced Penalties
The new law offers relief to plan participants who inadvertently fail to comply with RMD and other requirements. Effective for tax years after Dec. 31, 2022, the excise tax for non-compliance with RMD requirements is decreased from 50% to 25% of the shortage amount, or to 10% if the deficiency in corrected within two years.
The act also reduces the penalty for certain reporting errors made by plan sponsors and includes provisions to cut down on sponsors’ administrative paperwork and disclosure notices within two years.
SECURE 2.0 is a massive 350-page piece of legislation with new provisions impacting a wide variety of plan types, business sizes and income classes. For information on your specific retirement plan or employees, please contact Jeffrey Cohen, tax services leader at Grassi Advisors & Accountants, at jcohen@grassicpas.com.
