Understanding SECURE 2.0 Act: Key Provisions Affecting Retirement Plans

The SECURE 2.0 Act, officially known as the “Setting Every Community Up for Retirement Enhancement 2.0 Act,” was signed into law in December 2022. This landmark legislation builds upon the original SECURE Act of 2019, introducing several new provisions to enhance retirement savings options, simplify plan administration, and improve access to retirement accounts. The aim is to make it easier for Americans to save for retirement and improve their financial security during retirement.

In this article, we’ll explore the major provisions of SECURE 2.0 that affect retirement plans, employers, and employees. Let’s break down how these changes can impact your financial planning and the overall retirement landscape.

1. Increase in Required Minimum Distribution (RMD) Age

One of the most notable changes under SECURE 2.0 is the gradual increase in the age at which individuals must begin taking Required Minimum Distributions (RMDs) from retirement accounts.

• Previous Rules: Prior to SECURE 2.0, individuals were required to start taking RMDs at age 72.

• SECURE 2.0 Update: The RMD age has been raised to 73 starting in 2023, and it will increase further to 75 by 2033. This allows individuals to keep their savings invested longer and defer taxes on withdrawals.

2. Expanded Automatic Enrollment in 401(k) and 403(b) Plans

To encourage more people to save for retirement, SECURE 2.0 introduces a mandate for automatic enrollment in new employer-sponsored 401(k) and 403(b) plans.

• Automatic Enrollment: Starting in 2025, employers offering new 401(k) or 403(b) plans must automatically enroll employees at a minimum contribution rate of 3%, which will increase by 1% each year until reaching at least 10%, but not more than 15%. Employees can opt out if they choose, but the intent is to make participation the default.

3. Catch-Up Contribution Limits Increased for Older Workers

SECURE 2.0 also increases the catch-up contribution limits for individuals nearing retirement.

• Current Catch-Up Limits: Before SECURE 2.0, individuals aged 50 and over could contribute an extra $7,500 annually to their 401(k) or 403(b) plans.

• New Limits: Beginning in 2025, individuals aged 60 to 63 will be allowed to contribute up to $10,000 or 150% of the regular catch-up contribution limit, whichever is greater.

This provision helps older workers who are closer to retirement make up for missed savings opportunities earlier in their careers.

4. Roth Matching Contributions

Employers now have more flexibility in the types of contributions they can offer to employees’ retirement plans.

• New Option: Under SECURE 2.0, employers can choose to match employee contributions with Roth (after-tax) dollars rather than traditional pre-tax contributions. Employees must elect this option, and such contributions will be taxed in the year they are made, but the funds can grow tax-free.

5. Emergency Savings Linked to Retirement Accounts

Many employees face challenges saving for emergencies while also contributing to retirement accounts. SECURE 2.0 addresses this issue by allowing emergency savings accounts to be linked to retirement plans.

• New Savings Option: Employers may offer a special account that allows employees to save up to $2,500 per year for emergencies. These contributions are treated similarly to Roth contributions (after-tax), and the first four withdrawals per year are tax- and penalty-free. This flexibility aims to prevent individuals from dipping into their retirement savings during emergencies.

6. Matching Contributions for Student Loan Repayments

SECURE 2.0 includes provisions aimed at helping individuals who are burdened with student loan debt to still save for retirement.

• Employer Matching for Loan Repayments: Starting in 2024, employers will be allowed to match employees’ student loan repayments with contributions to their retirement plans. This allows employees who are focused on repaying their loans to simultaneously build retirement savings.

7. Saver’s Match Replaces Saver’s Credit

The SECURE 2.0 Act replaces the existing Saver’s Credit with a Saver’s Match, which is designed to encourage lower-income earners to contribute to retirement accounts.

• New Saver’s Match: Starting in 2027, eligible individuals will receive a federal matching contribution of up to 50% of their retirement contributions, capped at $1,000 per person. This match will be deposited directly into the individual’s retirement account, giving a tangible boost to retirement savings.

8. Expansion of SIMPLE and SEP IRA Plans

SIMPLE (Savings Incentive Match Plan for Employees) IRAs and SEP (Simplified Employee Pension) IRAs are commonly used by small businesses to offer retirement plans to employees. SECURE 2.0 includes provisions that make these plans more attractive.

• Contribution Increases: Employers sponsoring SIMPLE plans will have the option to make additional contributions beyond the standard limits. Furthermore, starting in 2024, SIMPLE IRAs will have higher catch-up contribution limits for employees aged 50 and over.

• SIMPLE Roth IRAs: SECURE 2.0 allows for the creation of Roth SIMPLE IRAs, providing participants with a tax-advantaged option for retirement savings.

9. Small Business Incentives for Offering Retirement Plans

To encourage more small businesses to offer retirement plans, SECURE 2.0 provides financial incentives.

• Increased Tax Credits: Beginning in 2023, small businesses can receive tax credits covering up to 100% of the administrative costs associated with starting a new retirement plan, up to $5,000 per year. Additionally, a new credit of up to $1,000 per employee for employer contributions is available for businesses with fewer than 50 employees.

10. Enhancements to 403(b) Plans

Employees of public schools and certain non-profit organizations often participate in 403(b) plans. SECURE 2.0 introduces several updates to these plans.

• Collective Investment Trusts: Starting in 2024, 403(b) plans will be allowed to participate in collective investment trusts, which are already available in 401(k) plans. This could reduce fees and improve investment options for participants.

11. Qualified Charitable Distributions (QCD) Limits

For individuals who make charitable contributions from their IRAs, SECURE 2.0 expands the rules governing Qualified Charitable Distributions (QCDs).

• Increased QCD Limits: The annual QCD limit of $100,000 will now be indexed for inflation starting in 2024. Additionally, individuals can make a one-time QCD of up to $50,000 to charitable remainder trusts, charitable gift annuities, or other planned giving vehicles.

12. Expanded Access to Annuities in Retirement Plans

Annuities can provide guaranteed income in retirement, and SECURE 2.0 expands access to these products within retirement plans.

• New Rules: Starting in 2024, SECURE 2.0 allows plans to offer annuities with more flexible terms, including those that can continue to make payments past the RMD age. This provision offers individuals more options for ensuring a steady income during retirement.

13. Lifetime Income Disclosure Requirement

SECURE 2.0 strengthens the rules around retirement plan disclosures.

• Enhanced Transparency: Retirement plan administrators must now provide participants with annual statements that project how much monthly income their current savings would generate in retirement. This requirement aims to help individuals better understand their savings progress and plan for future income needs.

14. Penalty-Free Withdrawals for Specific Hardships

SECURE 2.0 allows for more flexibility when it comes to withdrawing funds from retirement accounts in certain hardship situations.

• Expanded Exceptions: Penalty-free withdrawals of up to $1,000 per year will be allowed for emergencies, with no need to repay the funds. Additionally, penalty-free withdrawals are available for victims of domestic abuse, individuals with terminal illnesses, and those affected by federally declared disasters.

15. Improvements to Plan Portability

SECURE 2.0 makes it easier for employees to transfer retirement plan balances when they change jobs.

• Automatic Portability: The act encourages automatic rollovers of low-balance retirement accounts into new employer plans, reducing the risk of individuals cashing out their retirement savings when switching jobs.

Frequently Asked Questions (FAQs)

1. What is the new age for Required Minimum Distributions (RMDs)?

The RMD age has increased to 73 starting in 2023 and will rise to 75 by 2033 under SECURE 2.0.

2. How does SECURE 2.0 encourage automatic enrollment?

SECURE 2.0 mandates automatic enrollment in new 401(k) and 403(b) plans, starting at a 3% contribution rate and increasing annually.

3. What are the new catch-up contribution limits?

Individuals aged 60 to 63 can contribute up to $10,000 or 150% of the regular catch-up limit starting in 2025.

4. Can employers match Roth contributions?

Yes, employers can offer Roth matching contributions under SECURE 2.0, allowing employees to receive after-tax matches.

5. How does SECURE 2.0 help with student loan debt?

Starting in 2024, employers can match employees’ student loan repayments with contributions to their retirement plans.