Happy New Year to all of Seidel Schroeder’s Clients and Colleagues! May 2023 bless you with health, wealth, and happiness. We would like to catch you up on actions taken by Congress and the President that brought in the new year and may be of interest and benefit to you.
What SECURE Act 2.0 Means for Your Retirement Plan
Congress recently passed the SECURE Act of 2022 (SECURE Act 2.0) as part of the Consolidated Appropriations Act of 2023 and it was signed into law on December 29, 2022. Key changes to retirement plans include:
- Increase in beginning age for Required Minimum Distributions – The beginning age at which beneficiaries must begin taking required minimum distributions from qualified retirement plans increases to age 73 starting on January 1, 2023 and then increases to age 75 in 2033.
- Elimination of Required Minimum Distributions for Roth 401(k) Accounts – Starting in 2024, participants will no longer be required to take required minimum distributions from Roth 401(k) accounts.
- Increase in catch-up contributions – Beginning after December 31, 2024, the SECURE Act 2.0 increases the current catch-up limit for participants ages 60 to 63 to the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the regular catch-up limit.
- Roth treatment of catch-up contributions – Effective for plan years beginning after December 31, 2023, the SECURE Act 2.0 requires that catch-up contributions made by participants in 401(k), 403(b) and 457(b) must be made on a Roth basis. Participants with compensation of $145,000 (indexed for inflation) or less are exempt from this requirement.
- Roth employer contributions allowed – SECURE Act 2.0 allows 401(k), 403(b) and 457(b) plans to elect to allow participants to designate all or a portion of employer matching or nonelective contributions as designated Roth contributions. However, the employer contributions must be fully vested when made to the plan.
- Roth contributions allowed in SIMPLE IRAs and SEPs – Beginning in 2023, Simple IRAs and SEPs can allow employees to treat contributions as nondeductible Roth contributions.
- Rollovers from Section 529 Plans to Roth IRAs – The act allows tax and penalty-free direct trustee-to-trustee rollovers from a Section 529 account to a Roth IRA. To qualify, the Section 529 account must have been open for more than 15 years. Rollovers are subject to annual Roth IRA contribution limits and the lifetime rollover limit is $35,000.
- Automatic enrollment for new plans – Any new 401(k) or 403(b) plans established after the SECURE Act 2.0’s enactment date will be required to provide for automatic enrollment and escalation of eligible employees for plan years beginning after December 31, 2024. Employees who do not wish to participate would be required to opt out. However, some plans are exempt from this requirement, including small employers with 10 or fewer employees.
- Saver’s Match Contributions – For tax years beginning after December 31, 2026, the SECURE Act 2.0 provides for a matching contribution of 50% of an eligible individual’s contributions to an individual retirement account or employer retirement plan, up to $2,000. The match will phase-out for taxpayers with modified gross income between $41,000 and $71,000 for married filing jointly and $20,500 to $35,500 for single taxpayers (adjusted annually for inflation after 2027).
- Excise Tax Reduced – If taxpayer fails to take RMDs, the penalty will be 25% (a reduction from 50%). If the RMD is corrected in a timely manner, the excise tax is reduced to 10%.
- Penalty-Free Withdrawals Expanded – The act adds new exceptions to penalty-free withdrawals which include emergencies subject to a maximum amount of $1,000 per year for unforeseeable or immediate financial needs relating to necessary personal or family emergencies. Additionally, withdrawals for domestic abuse victims (up to $10,000), terminal illness subject to certain definitions, and in connection with qualified disasters (up to $22,000)
- Employee Self-Certification of Hardship – Plans may rely on a participant’s self-certification that they have had an event that constitutes a hardship for purposes of taking a hardship withdrawal.
- Matching Contributions for Student Loan Payments – Effective for plan years beginning after December 31, 2023, employers will be able to make matching contributions to a retirement plan for certain qualified student loan payments made by employees.
- Surviving Spouse’s Election – Within an employer-provided qualified retirement plan, if a participant passes away before RMDs have begun, the act allows after calendar year 2023 for the designated beneficiary surviving spouse to elect to be treated as if they were an employee for purposes of the RMD rules.
- Retroactive Elections for Sole Proprietors – Sole Proprietors will be able in the plan’s first year, to retroactively make an elective deferral under a 401(k) plan up until the time the individual files their return (determined without consideration of any extensions).
- Addition of Two New Retirement Plans – The SECURE Act 2.0 creates two new retirement plans, the starter 401(k) deferral-only arrangements and safe-harbor 403(b) plans.
- Retirement Plan linked Emergency Savings Accounts – Effective for plan years beginning after December 31, 2023, plans will be allowed to create emergency savings accounts where non-highly compensated employees can make Roth contributions within the plan. Such accounts would be eligible for distribution at least once a month and contributions cannot be made that would cause the balance to exceed $2,500 (adjusted for inflation after 2024).
- Increased tax credits for new plans of small employers – SECURE Act 2.0 increases the tax credit for employers with 50 or fewer employees from 50% to 100% of administrative costs for establishing a retirement plan up to $5,000. In addition, employers with 100 or fewer employees could be eligible for tax credits based upon employee matching or profit-sharing contributions for the first five years of a new plan.
- Retirement savings lost-and-found database – The act calls for the creation of an online database where individuals can search for plans and contact information of plan administrators of plans in which they are a participant or beneficiary. The database is to be created within two years of enactment of the act.
Please reach out to your Seidel Schroeder advisor should you have any questions.
Your Team at Seidel Schroeder