SECURE 2.0 – Major Changes to Retirement Savings Plans

Adapted from ADP’s article: SECURE 2.0 Act of 2022 Makes Sweeping Changes to Retirement Savings Plans

On December 29, 2022, the Consolidated Appropriations Act of 2023 (HR 2617) was signed into law. The Act includes new provisions affecting retirement savings plans, these new rules fall under the name “SECURE 2.0.” The provisions offer many new benefits to employers and employees which are designed to make it more attractive for employers to offer retirement plans and to improve retirement outcomes for employees.

The law builds on earlier legislation that increased the age at which retirees must take required minimum distributions (RMDs) and allowed workplace saving plans to offer annuities, capping years of discussions aimed at bolstering retirement savings through employer plans and IRAs.

Key takeaways

  • The age to start taking RMDs increases to age 73 in 2023 and to 75 in 2033.
  • The penalty for failing to take an RMD will decrease to 25% of the RMD amount, from 50% currently, and 10% if corrected in a timely manner for IRAs.
  • Starting in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans.
  • Catch-up contributions will increase in 2025 for 401(k), 403(b), governmental plans, and IRA account holders.

While the Act includes over 90 provisions regarding retirement plans, below is a summary of selected provisions that will have a large impact for both employers and workers.

  • Automatic enrollment and automatic plan portability. The law requires businesses adopting new 401(k) and 403(b) plans, to automatically enroll eligible employees, starting at a contribution rate of at least 3%, starting in 2025. Employees can opt-out of participation. It also permits retirement plan service providers to offer plan sponsors automatic portability services, transferring an employee’s low balance retirement accounts to a new plan when they change jobs. The change could be especially useful for lower-balance savers, who typically cash out their retirement plans when they leave jobs, rather than continue saving in another eligible retirement plan.
  • Automatic Escalation. Beginning in 2025, for new retirement plans started after December 29, 2022, contribution percentages must automatically increase by one percent, on the first day of each plan year following completion of a year of service, until the contribution is at least 10 percent, but no more than 15 percent of eligible wages. Exceptions apply for governmental and church plans, businesses with 10 or fewer employees, and employers that have been in business for less than three years.
  • Matching for Roth accounts. Employers will be able to provide employees the option of receiving vested matching contributions to Roth accounts (although it may take time for plan providers to offer this and for payroll systems to be updated). Previously, matching in employer-sponsored plans were made on a pre-tax basis. Contributions to a Roth retirement plan are made after-tax, after which earnings can grow tax-free. Important to know: Unlike Roth IRAs, RMDs from an employer-sponsored plan, are required for Roth accounts, until tax year 2024.
  • Expanded Eligibility for Long-Term, Part-Time Employees. Currently, employees who work between 500 and 999 hours for three consecutive years must be allowed to participate in their company’s retirement plan. SECURE 2.0 reduces the time period to two years, effective in 2025. This does not apply to employees who participate in collectively bargained plans, or to nonresident aliens.
  • Required Minimum Distributions (RMDs). The requirement to begin taking RMDs will increase from age 72 to age 73 in 2023, and then to age 75 in 2033. In addition, the penalty for not taking a RMD is reduced from 50 percent of the amount required to be withdrawn currently to 25 percent, and to 10 percent, if corrected within two years.
  • Immediate Incentives for Participation. Currently, employers can only provide matching contributions as an incentive to participate in a retirement savings plan. Effective for plan years beginning after 2022, employers may offer modest financial incentives, such as gift cards, which may help increase participation. However, any financial incentives should be of de minimis amounts and cannot be paid with plan assets.
  • Student loan debt. Starting in 2024, employers will be able to “match” employee student loan payments with matching payments to a retirement account, giving workers an extra incentive to save while paying off educational loans.