The Secure 2.0 Act became law just before the close of 2022, as part of the federal spending bill.
Roll up your sleeves – the list of new retirement plan requirements and opportunities for businesses is lengthy.
That’s not surprising given that one of the primary goals of the Secure 2.0 Act of 2022 was to expand coverage and increase savings in retirement plans.
Check out our summary of key changes for Finance pros:
Retirement plan updates
In Title 1 alone of the Secure 2.0 Act, you’ll find 28 sections related to retirement plans. For example:
Section 101 makes automatic enrollment in 401(k) and 403(b) plans mandatory once participants become eligible, although they can opt out of coverage. The contribution amount is set by the law: at least 3% and not more than 10% to get started. That amount escalates by 1% each year until reaching 10%, with a cap of 15%.
Existing 401(k) or 403(b) plans are grandfathered. What’s more, the following exceptions have been provided:
- small businesses (those with 10 or fewer employees)
- new businesses (those operational for less than three years)
- church plans, and
- governmental plans.
The requirements of Section 101 kick in for plan years beginning after December 31, 2024.
According to Section 105, a pooled employer plan (PEP) may designate a named fiduciary who will collect plan contributions. However, this can’t be an employer in the PEP. The fiduciary would be responsible for having written contribution collection procedures, which the law says must be reasonable, diligent and systematic. All this is applicable for plan years beginning after December 31, 2022.
Section 107 increases the age for taking required minimum distributions (RMDs) from retirement plans. Recent legislation had already raised the age for these distributions to 72. Now the Secure 2.0 Act has bumped that age to 73. The effective date? January 1, 2023.
And there’s more – the RMD age will hit 75 on January 1, 2033.
Section 108 addresses catch-up contributions to individual retirement accounts (IRAs). The current limit on these contributions for people who’ve reached age 50 is $1,000. Section 108 indexes the catch-up contribution limit for IRAs, a change that’ll take effect in 2024.
In a similar vein, Section 109 provides information on catch-up contributions to 401(k) plans and other retirement plans. Starting in 2025, the limit on catch-up contributions for individuals who reach age 60, 61, 62 and 63 will be higher than what’s allowed for individuals who are 50. The limit will be the greater of:
- $10,000, or
- 50% more than the regular catch-up contribution amount.
After 2025, the limit will be indexed for inflation.
As explained in Section 110, certain employees not making contributions to their retirement plans will be permitted to receive matching contributions from their employers. Specifically, employees who are paying off student loans can receive matching contributions to their 401(k), 403(b) or 457(b) plans or SIMPLE IRAs. Furthermore, such employees can be tested separately when doing nondiscrimination tests related to elective contributions. Section 110 is effective for plan years beginning after December 31, 2023.
Section 112 points out that military spouses often don’t remain employed long enough to benefit from an employer’s retirement plan. Therefore, the law creates a tax credit for small employers offering defined contribution plans that make military spouses:
- eligible for retirement plan participation within two months of hire
- eligible for any matching or nonelective contributions they would have been eligible for at two years of service, and
- 100% immediately vested in all employer contributions.
This provision is in effect for 2023.
Section 113 deals with de minimis financial incentives, such as low-dollar gift cards. Using such incentives to encourage participation in retirement plans has been prohibited – until now. While long-term incentives like matching contributions may motivate some employees, immediate financial incentives may prompt others to join their employers’ retirement plans, the law notes. This section is in effect for plan years beginning after the law’s enactment.
Section 125 of the Secure 2.0 Act tweaks the rules for part-time employees and participation in 401(k) plans. Currently, employees who complete three consecutive years of service (at least 500 hours per year) are eligible for participation. That’s been reduced to two consecutive years for plan years beginning after December 31, 2024. Plus, the long-term, part-time coverage rules are extended to 403(b) plans – those that are subject to ERISA.
Our editorial team will continue to provide analysis of what’s included in the Secure 2.0 Act.