Secure 2.0 Act will make emergency access to retirement funds easier

Although Congress isn’t famous for cooperation, there was enough bipartisan support for the Secure 2.0 Act of 2022 (pages 817-946 of the Consolidated Appropriations Act of 2023) to get it signed into law. The intent is to make it more attractive for employers to offer retirement plans and potentially improve retirement outcomes for employees.

In a previous post, we told you about the automatic retirement plan enrollment requirement, updated IRA catch-up contribution limits, expanded plan eligibility for part-time employees and more.

But that’s not all.

How Secure 2.0 could drive retirement plan participation

A common objection to employee participation in retirement savings programs is having less money available for unforeseen emergencies. But that could change in 2024 when Secure 2.0’s Sections 115 and 127 kick in.

Employers will have the option to give non-highly compensated employees a choice to make after-tax contributions to an emergency savings account within the company retirement plan. This type of account would protect the principal and allow up to four withdrawals a year without penalty, tax or fees.

The maximum account balance allowed is $2,500, or can be a lower limit set by the employer. Once the cap is reached, additional contributions can be rolled over to the employee’s Roth defined contribution plan (if they have one) or stopped until the balance falls below the limit.

Leftover money in the account can be rolled over to a Roth account or IRA. When employment ends, the funds can be converted to another Roth account within the company plan or can be distributed to the participant.

Your employees also need to know that Secure 2.0 will ease up on the 10% penalty tax that’s imposed on the taxable portion of a retirement account withdrawn before age 59½. Next year, if an employee says they need retirement account funds because it’s an emergency, that excuse is good enough.

However, they’re only allowed one annual emergency distribution up to $1,000 – which is subject to income taxes – and they have the option to repay it within three years. No other emergency distribution exceptions are allowed for three years following the date of distribution, unless the full amount of the original distribution is repaid.

Additional new penalty tax exceptions for early distributions apply to individuals suffering from a terminal illness (Section 326) and for survivors of domestic abuse (Section 314). There are also special rules for retirement fund distributions connected with a qualified federally declared disaster (Section 331).

The Labor and/or Treasury Department may issue some guidance on these provisions.