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. Some provisions become effective immediately and others will become effective over the next several years. Below, we will break down each of the key provisions related to 401(k plans.

SECURE 2.0 builds on the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which expanded retirement coverage to more Americans. In addition, the new law includes several provisions designed to ease retirement plan administration which should encourage more employers to adopt 401(k) plans.

Key provisions of SECURE 2.0 Act related to 401(k) plans include:

  1. Requirement of automatic enrollment and automatic escalation effective January 1, 2025. Requires 401(k) plans established after December 29, 2022 to automatically enroll employees at a default rate between 3% and 10% and automatically escalate contributions at 1% per year to at least 10% (but no more than 15%). Of course, employees can always change their contribution rate or opt out of the plan at any time. Automatically enrolled employees will also be able to request a withdrawal of their contributions within 90 days of their first contribution. Existing plans are grandfathered without the requirement (unless an existing plan adopts a multiple employer plan “MEP” following the date of enactment), and new businesses in existence less than 3 years as well as those with 10 or fewer employees are exempt.

  2. Enhanced tax credits for small employer plans effective for tax years beginning January 1, 2023. The SECURE Act 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. In addition, 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.

  3. Permits employers who sponsor a SIMPLE IRA plan to replace that plan with a safe harbor 401(k) plan at any time during the year if certain criteria are met. This also waives the 2 year rollover limitation currently in place. Effective January 1, 2024.

  4. Ability to 401(k) match on student loans effective January 1, 2024. Heavy student debt burdens prevent many employees from saving for retirement, often preventing them from earning valuable matching contributions. Under this provision of the law, student loan repayments could count as an elective deferral or an elective contribution, and qualify for 401(k) matching contributions from their employer. The law would also permit a plan to test these employees separately for compliance purposes.

  5. Increased age for required minimum distributions (RMDs) to 75. The first SECURE Act increased the RMD age to 72 (from 70.5). The new Secure 2.0 law increases the RMD age even further: to 73 in 2023; and ultimately 75 in 2033.

  6. Reduces the failure to take RMD penalty from 50% to 25%, or 10% if the shortfall is corrected within 2 years. Effective January 1, 2023.

  7. Higher catch-up limits effective January 1, 2025. Catch-up contributions mean older Americans can make increased contributions to their retirement accounts. Under current law, participants who are 50 or older can contribute an additional $7,500 to their 401(k) plans in 2023. Secure 2.0 increases these limits to $10,000 for 401(k) participants aged 60-63 beginning in 2025.

  8. Certain catch-up contributions must be made on a Roth basis, effective January 1, 2024. Currently, all participants can choose whether to contribute on a pre-tax or Roth basis as their catch-up contributions. The new law requires that anyone who earned $145,000 (indexed) or more in the prior year must make catch-up contributions in Roth dollars (post-tax). This will provide less tax diversification for certain participants but will generate more tax revenue to help offset the cost of some of the other provisions in Secure 2.0

  9. Ability to contribute matching contributions in Roth dollars, effective January 1, 2023. Currently, all employer matching contributions must be made on a pre-tax basis. Under Secure 2.0, employers are allowed to offer matching contributions to participants on a Roth basis with immediate vesting required. 

  10. Additional incentives for employees to contribute, effective January 1, 2023. The only way an employer can currently incentivize employees to contribute to their 401(k) plan is through an employer match. Under Secure 2.0, employers can now offer additional incentives not paid for with plan assets, such as a small gift card benefit, to employees who contribute to their 401(k) without implicating the contingent benefit rule and prohibited transaction rules.

  11. One-year reduction in period of service requirements for long-term part time workers. The 2019 SECURE Act requires employers to allow long-term part-time workers to participate in the 401(k) plan if they work 500-999 hours consecutively for 3 years. The new law reduces the requirement to 2 years and states the first entry date for these employees is January 1, 2025. Keep in mind that plans with the normal 1000 hours in 12 months eligibility requirement for part-time employees must allow participants who meet that requirement to enter the plan.

  12. Ability to offer an “emergency savings account” within a 401(k) plan effective January 1, 2024. These accounts must be funded with Roth dollars and invested in cash, interest bearing deposit accounts  or principal preservation accounts. Annual contribution limit is $2,500 indexed. Participants may be automatically enrolled at 3%. Participants must be allowed to take at least 1 withdrawal per month and the first 4 withdrawals of each year must be fee-free.

  13. Ability to allow one penalty-free withdrawal of up to $1,000 per year effective January 1, 2024,  for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” This withdrawal may be repaid within 3 years. Only one withdrawal per three-year repayment period is permitted if the first withdrawal has not been repaid.

  14. “Starter 401(k) plans” available for employers with no existing plan effective January 1, 2024. New safe harbor plan design with reduced contribution limits (generally matching that of an IRA) and required automatic enrollment but no required compliance testing.

  15. Increase in voluntary force-out limit from $5,000 to $7,000 effective January 1, 2024.

  16. 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.

  17. Allows employers to rely on participant self certification that they have had a safe harbor event that constitutes a deemed hardship for purposes of taking a hardship withdrawal, effective January 1, 2023.

  18. 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.

  19. 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.

  20. “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.