The SECURE 2.0 Act Offers Many Planning Opportunities for Retirement Savers

Journal of Financial Planning: March 2023

Randy Gardner, J.D., L.L.M., CFP^®, CPA, RLP, AEP (Distinguished) is the founder of Goals Gap Planning, LLC.

Julie Welch, CFP^®, CPA/PFS, AEP (Distinguished) is the managing shareholder of Meara Welch Browne, P.C., an accounting firm in the Kansas City, Missouri, area. Randy and Julie just released the 2023 version of 101 Tax Saving Ideas (Eleventh Edition).

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On December 29, 2022, President Joe Biden signed the Consolidated Appropriations Act of 2023 into law. The heavily negotiated legislative package includes all appropriations for the federal 2023 fiscal year and the long-awaited SECURE 2.0 Act of 2022. There are 92 loosely related sections in the SECURE 2.0 Act. This article draws on the statute and on the Senate Finance Committee Report to list the most applicable and more immediate changes, with the effective dates shown in parentheses.

Major Changes Made by the Act

• Decreases the 50 percent penalty tax for failing to take required minimum distributions (RMDs) to 25 percent, or 10 percent if the failure is corrected in a timely manner (after 12/29/2022).
• Allows plans to provide participants with the option of receiving matching contributions on a traditional or Roth basis (after 12/29/2022).
• Provides small employers (with no more than 100 employees) that hire military spouses, who often do not remain employed long enough to become eligible for their employers’ retirement plans or to vest in employer contributions, with a tax credit of up to $500 with respect to their defined contribution plans if the employers: (1) make military spouses immediately eligible for plan participation within two months of hire, (2) upon plan eligibility, make the military spouse eligible for any matching or nonelective contribution that they would have been eligible for otherwise at two years of service, and (3) make the military spouse 100 percent immediately vested in all employer contributions (after 12/29/2022).
•  Authorizes employers to offer immediate financial incentives, such as low-dollar gift cards, not paid for with plan assets, to encourage employees to make elective deferrals to retirement plans (after 12/29/2022).
• Increases the age for taking RMDs to 73 (for those who turn 72 after 2022), and to 75 (for those who turn 74 after 2032) (effective in 2023).
•  Enhances the credit for the costs of starting an eligible retirement plan by extending the number of years the credit can be taken to five years for employers with 50 or fewer employees (2023). Except for defined benefit plans, the act allows an additional credit of 100 percent (dropping to 75 percent in the third year, 50 percent in the fourth year, and 25 percent in the fifth year) of employer contributions, with a maximum of $1,000 per employee, for employers with 50 or fewer employees (phase out for employers with between 51 and 100 employees). No credit is allowed for employer contributions for employees with wages over $100,000 (2023).
•  Requires that all catch-up contributions in retirement plans be subject to Roth rules, except for employees with compensation of $145,000 (indexed) or less (2024).
•  Eliminates RMDs from employer-provided Roth-designated (401(k) and 403(b)) accounts in employer plans, making the rule the same as for Roth IRAs (2024).
• Allows employers to make payments to qualified plans that match qualified student loan payments by employees (for plan years beginning after 2023).
• Indexes for inflation the current $1,000 catch-up limit on IRA contributions for individuals who have attained age 50 (2024).
• The act allows a surviving spouse to elect to be treated as the deceased employee for purposes of the RMD rules (2024).
• Allows up to $35,000 to be rolled over tax- and penalty-free from a 529 account to a Roth IRA, subject to the Roth IRA annual contribution limits, if the 529 account has been open for more than 15 years and the amount has been in the account for more than five years (2024).
• Provides that plan amendments made pursuant to this act are to be made on or before the last day of the first plan year beginning on or after January 1, 2025 (2027 in the case of governmental plans) as long as the plan operates in accordance with such amendments as of the effective date of an act requirement or amendment.

Qualified Charitable Distributions

• Indexes for inflation the $100,000 cap for qualified charitable distributions from IRAs (2023).
• Allows a one-time qualified charitable distribution of up to $50,000 to a split-interest entity, such as a charitable gift annuity, charitable remainder unitrust, or charitable remainder annuity trust (2023).

10 Percent Early Withdrawal Exceptions

• Adds a permanent exception to the 10 percent penalty tax for distributions before age 59½ for distributions as a result of a federally declared disaster (retroactive to 1/26/2021).
• Adds a penalty-free distribution exception for individuals who have been told by a physician in the past 84 months that they are terminally ill (after 12/29/2022).
• Adds a penalty-free distribution exception for victims of domestic abuse of up to the lesser of $10,000 or 50 percent of their account value (2024).
• Adds a penalty-free annual distribution exception for individuals with a financial emergency of up to $1,000, with the option to repay the distribution within three years (2024).
• Adds a penalty-free distribution exception to pay up to $2,500 per year for premiums for certain specified long-term care insurance contracts (2025).
• Restricts the recontribution period to three years for individuals who received penalty-free distributions from their retirement plans in the case of birth or adoption (after 12/29/2022 with a retroactive three-year lookback).

401(k), 403(b), and 457(b) Changes

• Allows plan participants in 401(k)s, 403(b)s, and governmental 457(b)s the option of having employer matches subject to Roth rules (after 12/29/2022).
• Allows 403(b) plans, which are generally sponsored by charities, educational institutions, and nonprofits, to participate in multiemployer  plans and pooled employer plans, similar to qualified plans, including relief from the one-bad-apple rule so that the violations of one employer do not affect the tax treatment of employees of compliant employers (after 12/29/2022).
• Provides that, in addition to annuities and mutual funds, 403(b) custodial accounts are allowed to offer collective (group) investment trusts, similar to other tax-preferred savings plans and IRAs (after 12/29/2022).
• Allows new solo 401(k) plans sponsored by sole proprietors or single-member LLCs to receive employee contributions up to the date of the employee’s tax return filing date for the initial year (after 12/29/2022).
• Allows employees to self-certify that they have had an event that constitutes a hardship for purposes of taking a hardship withdrawal (after 12/29/2022).
• Modifies 403(b) hardship distribution rules to conform to the 401(k) hardship distribution rules (2024).
• Allows employers that do not sponsor a retirement plan to offer a starter 401(k) plan (or safe harbor 403(b) plan), which generally requires that all employees be default enrolled in the plan at a 3 to 15 percent of compensation deferral rate, with a limit on annual deferrals equal to the IRA contribution limit ($6,500 in 2023) and an additional $1,000 (indexed for inflation) in catch-up contributions beginning at age 50 (2024).
• Expands automatic enrollment in retirement plans requiring new 401(k) and 403(b) plans to automatically enroll employees in plans once they become eligible to participate at no less than 3 percent and no more than 10 percent of salary for new plans beginning after 2024. The employee contribution amount is increased by 1 percent every year thereafter (up to 10 percent but not more than 15 percent). Employees can opt out of automatic enrollment. Small businesses with 10 or fewer employees and certain other businesses are exempt (2025).
• Increases catch-up contributions for participants aged 60–63 to the greater of $10,000 or 150 percent of the “standard” catch-up amount (e.g., if the “standard” catch-up amount for 2025 was $7,500, it would be $11,250—150 percent of $7,500) for 401(k) and 403(b) plans (2025).
• Changes the three years of 500 hours of service part-time employee rule for 401(k) plans to two years (2025).

SIMPLE and Simplified Employee Pension (SEP) Plan Changes

• Allows SIMPLE IRAs and SEPs to accept Roth contributions (2023).
• Allows employers of domestic employees (e.g., nannies and groundskeepers) to provide retirement benefits for such employees under a SEP (2023).
• Increases the annual SIMPLE IRA and SIMPLE 401(k) deferral limit and the catch-up contribution at age 50 by 10 percent, as compared to the limit that would otherwise apply in the first year this change is effective, in the case of an employer with no more than 25 employees. An employer with 26 to 100 employees would be permitted to provide higher deferral limits, but only if the employer either provides a 4 percent matching contribution or a 3 percent employer contribution (2024).
• Allows an employer with a SIMPLE plan to make additional contributions to each employee of the plan in a uniform manner, provided that the contribution may not exceed the lesser of up to 10 percent of compensation or $5,000 indexed for inflation (2024).
• Allows an employer to replace a SIMPLE IRA plan with a SIMPLE 401(k) plan or other 401(k) plan that requires mandatory employer contributions during a plan year (2024).
• Increases catch-up contributions for SIMPLE plan participants aged 60–63 to the greater of $5,000 or 150 percent of the “standard” catch-up amount (e.g., if the “standard” catch-up amount for 2025 was $3,500, it would be $5,250—150 percent of $3,500) indexed for inflation (2025).

Life Annuities in Retirement Plans

• Eliminates the barriers to the availability of life annuities in qualified plans and IRAs that arise under current law, such as the inability to offer guaranteed annual increases of only 1 or 2 percent, return of premium death benefits, and period certain guarantees for participating annuities (after 12/29/2022).
• Excludes qualifying longevity annuity contracts (QLACs) from the 25 percent limit, allows up to $200,000 (indexed for inflation) from an account balance to be used to purchase a QLAC, and permits QLACs to offer spousal survival rights (after 12/29/2022).
• Directs the Treasury Department to update its regulations to allow “insurance dedicated” exchange-traded funds that could be made available through individual variable annuities (after 12/29/2022).
• Provides that tax-preferred retirement accounts that hold an annuity are no longer required to bifurcate the portion of the account holding the annuity and the rest of the account for purposes of applying the RMD rules (after 12/29/2022).

The Revised Saver’s Match Credit

• Changes the Saver’s Credit with respect to retirement plan contributions from the current tiered structure to a 50 percent credit (up to $2,000) to be deposited directly into the IRA or retirement plan with phaseouts for higher-income taxpayers (effective for tax years beginning after 2026).
• Directs the Treasury Department to increase public awareness of the Saver’s Match to increase use of the match by low- and moderate-income taxpayers and make clear that the Saver’s Match cannot be withdrawn without incurring penalties, including repayment to the Treasury Department in some cases where the Saver’s Match is withdrawn from an individual retirement account before retirement (by July 1, 2025).

Employee Stock Ownership Plans (ESOPs)

• For employee stock ownership plans (ESOPs) established by S corporations, allows a 10 percent of the company ownership threshold. An individual owner of stock in a non-publicly traded C corporation that sponsors an ESOP may elect to defer the recognition of gain from the sale of such stock to the ESOP if the seller reinvests the sales proceeds into qualified replacement property as long as the ESOP owns at least 30 percent of the employer corporation’s stock after the sale (for sales made after December 31, 2027).
• To make it easier for annually audited companies to offer ESOPs, allows certain non-exchange traded securities to qualify as “publicly traded employer securities” so long as the security is subject to priced quotations by at least four dealers on a Securities and Exchange Commission-regulated interdealer quotation system, is not a penny stock, is not issued by a shell company, and has a public float of at least 10 percent of outstanding shares (2028).

Miscellaneous

• Disallows the charitable deduction for a qualified conservation contribution if the deduction claimed exceeds two and one-half times the sum of each partner’s relevant basis in the contributing partnership, unless the contribution meets a three-year holding period test, substantially all of the contributing partnership is owned by members of a family, or the contribution relates to the preservation of a certified historic structure (after 12/29/2022).
• Modifies U.S. Tax Court judges’ retirement benefits to match the benefits of other federal judges (after 12/29/2022).
• Provides that, if an individual has multiple IRAs and engages in a prohibited transaction, only the IRA with respect to which the prohibited transaction occurred will be disqualified (after 12/29/2022).
• Extends the sunset date for overfunded pension plans to pay retirees’ health and life insurance benefits from 2025 to the end of 2032 (after 12/29/2022).
• Clarifies that a pooled employer plan may designate a named fiduciary (other than an employer in the plan) to collect contributions to the plan (after 12/29/2022).
• Eliminates, for non-highly compensated employees who participate in a rural electric cooperative retirement plan, the compensation-based limit for pension participants of the lesser of $265,000 (2023) or 100 percent of the participant’s average compensation (after 12/29/2022).
• Requires the Treasury Secretary to help locate U.S. savings bond owners by sharing certain relevant information with a state that relates to an applicable savings bond registered to an owner with a last known or registered address in that state (after 12/29/2022).
• Allows retirement plan service providers to provide employer plans with automatic portability services, including the automatic transfer of a participant’s default IRA (established in connection with a distribution from a former employer’s plan) into the participant’s new employer’s retirement plan, unless the participant affirmatively elects otherwise (2023).
• Allows employers to automatically opt employees into an accessible, Roth-like emergency savings account at no more than 3 percent of their salary, up to a cap of $2,500 of employee contributions (2024).
• Creates a national online searchable “lost and found” database for employers’ and employees’ retirement plans at the Department of Labor (2024).
• Increases the upper limit for when employers may transfer former employees’ retirement accounts from a workplace retirement plan into an IRA from $5,000 to $7,000 (2024).
• Increases the eligibility age by which blindness or disability must occur for ABLE accounts from 26 to 46 (2026).

The SECURE 2.0 Act expands the opportunities to save additional amounts for retirement, corrects inconsistencies between retirement plans that have existed for years, and eases the rules for participants to access the funds in their retirement accounts. Informing our clients of these changes may encourage them to save more for their futures.