SECURE Act 2.0: Signed into Law
Formally called the SECURE 2.0 Act of 2022, the legislation expands retirement plan coverage and makes it easier for employers to offer retirement plan benefits.
The SECURE 2.0 Act of 2022 was signed into law on December 29, 2022. Let’s break down each of the key provisions related to 401(k)s, between those that will be required versus those that will be optional, based on their effective year, and whether the provision is geared towards participants, new plans, or all plans (existing and new). Then we’ll highlight which provisions we’re most excited about and why.
- Participants: Increases the Required Minimum Distribution (RMD) age to 73 in 2023; and to 75 in 2033. Also, failure to take RMD penalty reduced from 50% to 25%, or 10% if the shortfall is corrected within 2 years.
- Participants: Anyone who earned $145,000 (indexed) or more in the prior year must make catch-up contributions in Roth dollars.
- Participants: Elimination of Required Minimum Distribution (RMD) for Roth 401(k) accounts.
- All plans with effective dates of 12/29/2022 or later: Automatic enrollment must go into effect by 1/1/2025. Deferrals must be between 3-10%, escalating to 10-15%. Newly auto-enrolled participants must have a 90-day window to request their funds back.
- All plans: Part-time employees who work at least 500 hours in at least two consecutive years must enter the plan (this was 3 years in the first SECURE Act).
- Participants: Participants aged 60-63 can contribute up to $10,000 (indexed) as catch up, others over 50 can contribute $7,500 (indexed).
- New plans: Increases tax credit to up to 100% of plan startup costs for employers with up to 50 employees. Plus a new tax credit on employer contributions for up to $1,000 per participating employee with wages less than $100,000 (indexed).
- All plans: Employers can provide small non-matching incentives (gift cards) to employees who begin contributing for the first time.
- All plans: Employers allowed to match in Roth dollars (must be 100% vested), based on selection made by participants.
- All plans: Employers can rely on participants to self-certify that they have had a safe harbor event that constitutes a deemed hardship.
- All plans: Qualified student loan payments can effectively be considered deferrals for purposes of 401k matching contributions.
- All plans: Emergency savings account within the 401(k) for non-highly compensated employees (NHCEs). Must be funded post tax (Roth), invested in cash or principal reservation vehicle and can be withdrawn from at least once per month, with 4 annual withdrawals fee free. Annual contribution limit is $2,500 (indexed) and automatic enrollment can be applied.
- All plans: Force out limit increase, from $5,000 to $7,000
- All plans: Ability to offer one penalty free withdrawal of up to $1,000 from plans for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.”
- New plans: SIMPLE IRA plans allowed to be replaced at any time during the year if certain criteria are met. This also waives the 2 year rollover limitation currently in place.
- New plans: Ability to establish a new, safe harbor plan with no employer contributions requirements and no compliance testing; however, contribution limits will reflect that of an IRA.
Top 3 provisions we’re most excited about
1. Automatic enrollment for all (with exceptions).
Participation rates at plans with automatic enrollments are much higher than those with voluntary enrollment, based on Betterment’s internal data (87% participation rate with auto-enrollment, 37% without, as of 02/03/23), as well as industry reports. If you’re offering a 401(k) plan to your employees, there’s no better way to get people to use the benefit than automatically enrolling them. Of course, people can always opt-out (which is not common), and the SECURE Act’s provision stipulates that people must be able to get a “refund” of any automatic contributions within 90 days.
Which employers are exempt from the automatic enrollment requirement?
- Plans that have been in effect since before 12/29/22 do not need to add automatic enrollment (unless an existing plan adopts a multiple employer plan (MEP) following 12/29/22).
- New businesses in existence less than 3 years.
- Businesses with 10 or fewer employees. Keep in mind any plan is welcome to add automatic enrollment at any time!
2. Student loan payments may qualify for employer matching into a 401(k).
More than 40 million Americans are grappling with $1.73 trillion dollars of student debt. Those Americans are less likely to contribute to a 401(k) plan as a result. But if their employer offers a match on 401(k) contributions, those people are missing out, even though they’re trying to do the right thing by paying off their loans. This provision would allow qualifying student loan payments to count as if they’re contributing to a 401(k) and receive their employer’s matching contribution into a 401(k) account, even though they are not contributing to it themselves.
It just so happens that Betterment has been preparing for this provision! We already offer a Student Loan Management tool that allows employees to pay off their loans alongside their 401(k) contributions. In the coming months, we’ll be hard at work to build out what’s needed for this new matching contribution provision.
3. Significant tax credit increase if starting a new plan.
The SECURE Act of 2019 already provided businesses with fewer than 100 employees a three-year tax credit for up to 50% of plan start-up costs. The new law increases the credit to up to 100% of the costs for employers with up to 50 employees.
On top of that, SECURE Act 2.0 offers a new tax credit for 5 years to employers with 50 or fewer employees, encouraging direct contributions to employees. This new tax credit would be up to $1,000 per participating employee with wages less than $100,000 (indexed annually). The credit also applies to employers with 51-100 participants but the amount of the credit is phased out for this group.
A few other provisions on our radar:
- Penalty-free withdrawals in case of domestic abuse. The new law allows domestic abuse survivors to withdraw the lesser of $10,000 or 50% of their 401(k) account, without being subject to the 10% early withdrawal penalty. In addition, they would have the ability to pay the money back over 3 years.
- Expansion of Employee Plans Compliance Resolution System (EPCRs). To ease the burdens associated with retirement plan administration, this new legislation would expand the current corrections system to allow for more self-corrected errors and exemptions from plan disqualification.
- Separate application of top heavy rules covering excludable employees. SECURE 2.0 should make annual nondiscrimination testing simpler by allowing plans to separate out certain groups of employees from top heavy testing. Separating out groups of employees is already allowed on ADP, ACP and coverage testing.
- “Retirement savings lost and found” directs the DOL to create a national, online lost and found database no later than January 1, 2025. So-called “missing participants'' are often either unresponsive or unaware of 401(k) plan funds that are rightfully theirs.