Automatic enrollment and expanded eligibility for certain part-time employees. For plan years beginning after Dec. 31, 2024, unless an exception applies, employers are required to automatically enroll eligible employees into their 401(k) plan or 403(b) plan at a rate of at least 3% of each employee’s compensation, which increases annually in 1% increments until the employee deferral rate reaches at least 10% (but no more than 15%). Employees have the choice to opt out of automatic enrollment or choose a different deferral percentage. This provision does not apply to plans in existence on Dec. 29, 2022, to small businesses with 10 or fewer employees, to the first three years of a new business, to church plans, or to government plans.
In addition, 401(k) retirement plan eligibility is expanded for long-term, part-time (at least 500 hours of service per year) employees. Under SECURE 1.0, for plan years beginning after Dec. 31, 2023, such employees must be eligible after three years of part-time service. SECURE 2.0 reduces the eligibility period from three years to two years effective for plan years beginning after Dec. 31, 2024. Additionally, SECURE 2.0 provisions apply to both 401(k) and Employee Retirement Income Security Act of 1974 (ERISA) 403(b) plans, while SECURE 1.0 provisions apply only to 401(k) plans.
Required minimum distribution (RMD). The starting age for individuals to make an RMD increases from 72 to 73 for individuals who attain age 72 after Dec. 31, 2022, and attain age 73 before Jan. 1, 2033. The starting age is increased to 75 for individuals who attain age 74 after Dec. 31, 2032.
Crowe observation
The reference to individuals who attain age 74 after Dec. 31, 2032, is thought to be a drafting error because the Dec. 31, 2032, date would result in two different required beginning dates for individuals born in 1959. The correct date is likely Dec. 31, 2033. Congress has ample time to correct this apparent error before the provision is effective.
In addition, the penalty for failing to make an RMD is reduced from 50% to 25% of the shortfall and is further reduced to 10% of the shortfall if corrected by the taxpayer no later than the earlier of:
- The end of the second tax year after the tax year in which the penalty tax is imposed
- The date of mailing of a notice of deficiency
- The date the tax is otherwise assessed
This provision is effective for tax years beginning after Dec. 29, 2022.
The SECURE 2.0 Act eliminates the RMD requirement for Roth accounts in 401(k), 403(b), and government 457(b) plans while the participant is alive. These accounts now will be treated more like Roth individual retirement accounts (IRAs), which already were exempt from the RMD rules. This provision is effective for tax years beginning after Dec. 31, 2023, except for RMDs that are due by April 1, 2024, as a result of reaching the RMD age in 2023. These RMDs still must be made by the April 1, 2024, due date.
Catch-up contributions. Employees aged 50 or older are permitted to make catch-up contributions (contributions in excess of the normal deferral limit) to 401(k), 403(b), and government 457(b) plans. The catch-up limit for 2023 is $7,500 ($3,500 for Savings Incentive Match Plan for Employees (SIMPLE) plans). SECURE 2.0 provides individuals who are aged 60-63 with a higher catch-up limit equal to the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the normal catch-up limit. This provision is effective for tax years beginning after Dec. 31, 2024.
Crowe observation
The “greater of” language is confusing because 150% of the normal catch-up limit is already in excess of $10,000 ($5,000 for SIMPLE plans). It is unclear under what circumstances the higher catch-up limit would be limited to $10,000 ($5,000 for SIMPLE plans).
Additionally, catch-up contributions to 401(k), 403(b), and government 457(b) plans historically could be made on either a pretax or after-tax Roth basis. SECURE 2.0 requires catch-up contributions to be made on an after-tax Roth basis for individuals earning more than $145,000. This provision is effective for tax years beginning after Dec. 31, 2023.
Employer matching contributions based on student loan payments. Employers may choose to match student loan payments (treating the employee’s student loan payments as though they are employee retirement plan contributions) under 401(k) plans, 403(b) plans, government 457(b) plans, and SIMPLE IRAs, allowing an employee with significant student loan debt to accumulate a retirement plan balance without making contributions. This provision is effective for plan years beginning after Dec. 31, 2023.
Election to make employer contributions on an after-tax Roth basis. Nonelective contributions and matching contributions to 401(k), 403(b), and government 457(b) plans always have been made on a pretax basis, resulting in taxation upon distribution. Under SECURE 2.0, employers may allow participants to elect to receive vested nonelective and matching contributions on an after-tax Roth basis, resulting in tax-free distributions. This provision is effective for contributions made after Dec. 29, 2022.
Small-business retirement plan startup credit. Prior to SECURE 2.0, the three-year small-business retirement plan startup credit was 50% of administrative costs, capped at $5,000 per year, for employers with no more than 100 employees. SECURE 2.0 increases the credit to 100% for employers with up to 50 employees.
The SECURE 2.0 Act also provides an additional credit equal to a percentage (beginning at 100% and decreasing by 25% each year over four years) of the amount contributed by the employer to a retirement plan, up to a maximum credit of $1,000 per employee. The additional credit is phased out for employers with between 51 and 100 employees, and sponsors of defined benefit plans are not eligible for the additional credit.
These changes are effective for tax years beginning after Dec. 31, 2022.
“Starter” retirement plans. Employers that do not currently sponsor a retirement plan may establish a new type of retirement plan referred to as a “starter” 401(k) or 403(b) plan. These plans are deferral-only arrangements where employees are automatically enrolled at a deferral rate between 3% and 15% of their compensation unless they affirmatively decline enrollment or choose another deferral rate. The annual deferral limit is $6,000 ($7,000 for employees aged 50 or older). Starter plans are exempt from nondiscrimination and top-heavy rules. This provision is effective for plan years beginning after Dec. 31, 2023.
Exception to 10% penalty tax on early distributions. SECURE 2.0 provides a number of new exceptions to the 10% penalty tax on premature retirement plan distributions (generally distributions prior to age 59½), including distributions on account of emergency (effective for distributions after Dec. 31, 2023), domestic abuse (effective for distributions after Dec. 31, 2023), terminal illness (effective for distributions after Dec. 29, 2022), qualified long-term care premiums (effective for distributions after Dec. 29, 2025), and federally declared disasters (effective for distributions with respect to disasters with an incident period that begins after Jan. 25, 2021).
Involuntary transfers to IRAs. The upper dollar limit for involuntary transfers to IRAs upon termination of employment is increased from $5,000 to $7,000. This provision is effective for distributions made after Dec. 31, 2023.
Looking ahead
Retirement plan administration is complex, and the changes made by the SECURE 2.0 Act are far-reaching. While the new law includes a number of provisions that are beneficial to plan participants, it also imposes new obligations on plan sponsors. Plan sponsors should work closely with their advisers to incorporate the required provisions of SECURE 2.0 into the administration of their plans in a timely way and to determine which optional provisions of SECURE 2.0 they might want to implement.
