Insights & Education

Retirement plans are a core component of employees’ compensation and a key differentiator for employers. 

Given the importance of retirement plans, it is essential that laws and regulations governing them keep up with the evolving challenges workers face. Many are feeling the economic impact of a global pandemic, inflation and fluctuating market conditions, while trying to balance today’s financial needs with planning for potentially 30 years in retirement.

On December 29, 2022, new federal retirement legislation was signed into law as part of the year-end omnibus legislation. SECURE 2.0 aims to improve retirement outcomes by increasing access to retirement plans, growing and preserving savings, and helping Americans manage competing financial priorities so they can achieve long-term financial security. This expands on retirement policies introduced by the Setting Every Community Up for Retirement Enhancement (SECURE) Act or “SECURE 1.0”, which was enacted into law in late 2019.

SECURE 2.0 is a large piece of legislation with more than 90 provisions. Some take effect immediately, others begin in 2024, 2025, or even later. Here is a synopsis of some of the key provisions and their effective dates.

Required Minimum Distributions (RMDs) are designed to ensure individuals use retirement savings in retirement, reducing the amount of money that could be transferred to beneficiaries. For many, however, this could mean tapping funds earlier than needed and their savings won’t last as long.

Here are some the SECURE 2.0 provisions that change the requirements around RMDs to enable individuals to preserve retirement income for longer:

Increase in mandatory age for RMDs.

In 2019, SECURE 1.0 increased the mandatory age for RMDs from 70½ to 72.

With SECURE 2.0, the mandatory age will increase to 73, effective January 1, 2023 and will increase again in 2033 to age 75.

Higher purchase levels for qualified longevity annuity contracts (QLAC).

A QLAC is a deferred annuity purchased with funds from a retirement account or IRA that can begin payments at age 85, well above the mandatory age for RMDs. The cap on purchasing a QLAC with retirement funds was limited to the lesser of

$125,000 or 25% of a person’s retirement funds. SECURE 2.0 eliminates the 25% limit and raises the cap to $200,000, indexed for inflation, effective immediately.

Elimination of the partial annuitization penalty.

For background, when a retirement account holds an annuity that has been annuitized, RMD requirements apply to both the annuity and the rest of the account, separately. This can result in larger distributions and higher federal income taxes for the individual.

Under SECURE 2.O, individuals can now aggregate annuities and other holdings for purposes of determining RMDs, which may help lower distribution amounts, reduce federal income tax, and allow savings to last longer. This is effective immediately.

Increase in catch-up contribution limits for ages 60-63.

Currently, plan participants 50+ can contribute an additional $7,500 to their retirement plan. Beginning January 1, 2025, catch-up limits for participants ages 60-63 will increase to the greater of $10,000 or 50% more than the regular limit for 2025.

Beginning January 1, 2024, catch-up contributions for workers with compensation higher than $145,000 in 2023, indexed for inflation, must be made into a Roth account.

Matching contributions for student loan payments.

Beginning January 1, 2024, employers can help alleviate the burden of student debt by matching an employee’s qualified student loan debt payment with a corresponding contribution to the employee’s retirement plan account.

Reduce eligibility timeline for part-time employees.

SECURE 1.0 required employers to allow part-time workers who work 500 hours for three years to participate in 401(k) plans. Effective January 1, 2025, this will be reduced to two years and will extend to 403(b) ERISA plans.

Saver’s Match for retirement plan contributions.

For individuals under certain income thresholds, current law provides a 50% tax credit for up to $2,000 in retirement plan and IRA contributions. Effective January 1, 2027, the tax credit will be replaced with a government match contribution into the person’s retirement account. This means if a plan participant makes a total annual contribution of $1,000, the government will contribute $500. If the participant contributes $2,000 or more annually, the matching contribution will be $1,000. Again, this does not go into effect until 2027.

A challenge for many workers is balancing financial needs now and for the future. Two provisions in SECURE 2.0 focus on helping employees manage unexpected expenses.

Allowing tax penalty-free access to retirement funds for emergency needs.

Employers may allow individuals to access up to $1,000 from their retirement savings for any unexpected expenses, without incurring the 10% early-withdrawal tax penalty. One distribution per year is allowed and must be repaid before another can be withdrawn. This is effective January 1, 2024.

Employer-administered Emergency Savings Accounts.

Another option for helping employees save is establishing after-tax emergency savings accounts (ESAs) that are linked to retirement accounts. Employers can automatically enroll employees at an amount up to 3% of their gross pay, until the account reaches $2,500. Contributions are treated as Roth elective deferrals, which employers can match in the retirement plan, up to the cap. Contributions over the limit can be directed to a Roth account or stopped. Of note, this provision excludes highly compensated employees, those who earn in excess of $150,000 in 2023. This takes effect January 1, 2024.

Provisions of note

Elimination of “first day of the month” deferral election rule for government 457(b) plans.

SECURE 2.0 eliminates the requirement that 457(b) governmental plan participants must make a deferral election in the month prior to the compensation being paid. Now, governmental 457(b) plans align with 401(k) and 403(b) plans by allowing participants to change their deferral rate at any time before the compensation is available to the individual. This is effective immediately.

Automatic enrollment and escalation for new retirement plans.

While plan sponsors currently have the option to require automatic enrollment and escalation in retirement plans for new hires, effective January 1, 2025, this will be required for all new employer-sponsored plans. Existing 401(k) and 403(b) plans are grandfathered from this requirement. Employees retain the ability to opt out of automatic enrollment and escalation.

Allowable participation in PEPs (pooled employer plans) for ERISA 403(b) plan sponsors.

PEPs expand on the MEP (multiple employer plans) concept by allowing unrelated 403(b) employers to participate in a single retirement plan. This is now in effect.

Increase in start-up tax credits for small employers.

Organizations with 50 or fewer employees benefit by an increase in the start-up credit for administrative costs from 50% to 100%. In addition, organizations with up to 100 employees are eligible for a start-up tax credit for joining a MEP or PEP, even if the plan is already active. This is now in effect.