New legislation commonly called “SECURE 2.0” was signed into law this past December. The new legislation includes almost 100 different changes that are linked to retirement plans. Following is a brief summary of some of the changes that may affect your company’s retirement plans with those changes presented in the order that they generally become effective.
Effective Immediately
Childbirth/Adoption Expenses. Retirement plans, such as 401(k) and 403(b) plans, are permitted, but not required, to allow employees to make withdrawals while employed to pay for expenses that they incur for childbirth and child adoption of up to $5,000 per child. For plans that include this feature, employees may be given the option to repay the withdrawn amount at a later time. This optional repayment period is changed under this new legislation from being unlimited to three years.
Effective January 1, 2023
RMD Ages. The required minimum distribution (RMD) age for retirement plans and IRAs has been changed from age 72 to age 73 for individuals first attaining age 72 after December 31, 2022. It will change to age 75 as of January 1, 2033.
Small Business Owners. Sole proprietors and single-member LLC owners may make voluntary employee contributions to a new 401(k) plan as late as the employee’s tax filing due date for the plan’s initial year.
Hardship Self-Certifications. Plan Administrators may permit, but are not required to permit, participants to self-certify that they qualify for a hardship withdrawal. This is an optional feature to reduce the burden of plan administration.
Small Incentives. Employers may offer small incentives, such as gift cards, to employees to encourage participation in their 401(k) plans and 403(b) plans.
Roth Conversions. Your defined contribution plan may permit eligible employees the option to convert to Roth contributions any employer contributions being made on their behalf. There are numerous logistical questions that must be answered before this optional feature may be offered under a plan.
Effective January 1, 2024
Age 50 Catch-Up Contributions. Age 50 catch-up contributions made to 401(k), 403(b) and 457(b) qualified plans must be made as Roth contributions by employees with compensation for the prior year exceeding $145,000 (indexed). Other employees may still make catch-up contributions on a pre-tax basis. If your plan does not permit Roth contributions, your plan may no longer permit age 50 catch-up contributions.
Student Loan Repayments. Matching contributions may be made by employers to a 401(k) plan, 403(b) plan or a SIMPLE IRA plan for employees who make “qualified student loan payments” for their outstanding student loans.
New Hardships. New hardship withdrawals may be permitted for “emergency expenses” of up to $1,000 per year (with repayment options) and to domestic abuse survivors of up to lesser of $10,000 (indexed) or 50% of vested benefits.
Sidecar Emergency Accounts. Employers have the option to create a “sidecar” emergency savings account for their non-highly compensated employees to be used for emergency withdrawals. The accounts are called sidecar accounts because they will be linked to, but separate from, the employer’s retirement plan. Employers may automatically opt employees into this arrangement with a “3% of salary” savings rate with a $2,500 savings cap. This change won’t become effective sooner than the government issues guidance.
Involuntary Cashouts. Under current rules, terminated employees with a retirement benefit worth $5,000 or less may be involuntarily cashed out. This $5,000 threshold for involuntary cashouts is increased to $7,000.
Plan Amendments. Plan amendments that increase plan benefits retroactively may be adopted as late as the employer’s tax filing due date. This may be a useful option for plans that discover after year end that there was a discrimination problem during the prior year.
DB Funding Notices. Defined benefit pension plans are already required to provide annual funding notices to participants. The notices will be required to explain funding issues more clearly.
Lump Sum Windows. Defined benefit pension plans that offer “lump sum window” programs will be required to provide additional information to employees who are being offered a one-time lump sum payment option. This change won’t become effective until after the Department of Labor issues guidance, which may make this change effective during 2024.
Starter 401(k) Plans. Starter 401(k) or 403(b) plans may be offered by employers with no current retirement plan. Employees will be auto enrolled in the plan at a 3% to 15% deferral rate.
Effective January 1, 2025
Age 60 Catch-Up Contributions. Age 50 catch-up contributions are limited to $7,500 for 2023. This limit will be increased by 50% for individuals age 60, 61, 62 or 63. For example, if the regular limit equals $8,000 for 2025, then the higher limit will equal $12,000 ($8,000 x 150%) for 2025 for those age 60, 61, 62 or 63.
Long-Term Part-Timers. Current rules require 401(k) plans to permit long-term part-time employees to make voluntary contributions after completing three consecutive years with at least 500 hours. The new law reduces the three-year requirement to two years and extends this rule to 403(b) plans governed by ERISA as well as to 401(k) plans.
Automatic Enrollment. New 401(k) and 403(b) plans must include automatic enrollment and automatic increase features starting at least at 3% and increasing 1% per year up to a maximum between 10% and 15%, inclusive. Excluded are pre-existing plans, businesses with 10 or fewer employees, new businesses, church plans and governmental plans.
Lost & Found Database. The U.S. Department of Labor is directed to create a national online database that may be used to locate plan participants who are missing.
Effective January 1, 2026
Paper Benefit Statements. Defined contribution plans must provide a paper benefit statement at least once per year unless a participant elects otherwise. For defined benefit pension plans, the paper benefit statement must be provided at least once every three years.
