SECURE 2.0: Summary of Changes Impacting Employer-Provided Retirement Plans

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Since the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was passed, there have been calls for additional reforms. Since then, several parcels of legislation have been introduced featuring dozens of provisions. These changes range from expanded plan access to part-time employees to student loan matching payments. Despite the various delays, the SECURE Act 2.0 was signed into law as part of the Consolidated Appropriations Act of 2023. The new law provides a number of important changes designed to make it easier for plan participants to conduct retirement savings. At the same time, several provisions impact plan sponsors from new tax incentives to new top-heavy testing requirements. It is worth noting that while some provisions became effective immediately, others will not go into effect for several years. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.

Key Employer Provisions

• Starter 401(k) and Safe Harbor 403(b) Plans – Companies that don’t have a current retirement offering plan will be able to offer a “starter 401(k) plan” beginning in 2024. This plan type is specifically designed to limit the cost of administration while offering participants retirement-saving benefits. Automatic enrollment is required, but an employee may elect out. The qualified percentage is determined by the plan, but it must not be less than 3% or more than 15%, and it must be applied uniformly. Under this arrangement, the salary deferral is limited to IRA contributions limits ($6,500 in 2023) plus catch-up contributions for those over age 50 ($1,000 in 2023). Employers may not make matching or non-elective contributions to starter plans. Similar rules apply to safe-harbor 403(b) plans for tax-exempt employers that do not already maintain a qualified plan.
• Automatic Enrollment – Beginning in 2025, eligible employees will be required to enroll automatically in new 401(k) or 403(b) plans. The enrollment rate needs to be 3% at a minimum and must escalate by 1% each year until it reaches 10%, but no more than 15%. An employee can “unwind” contributions and take permissible withdrawals within the first 90 days of automatic enrollment. Automatically contributed amounts must be invested in accordance with the requirements of Labor Department regulation 29 CFR Section 2550.404c-5 if the participant makes no investment decision. For multiemployer plans, the automatic enrollment requirements are applied separately to each employer. Exempt plans include those already established, small employers (10 or fewer employees), SIMPLE plans, new employers who have been around for less than 3 years, governmental plans, and church plans.
• Tax Credit – For employers with 50 or fewer qualifying employees, the new legislation provides an increased tax credit for starting a plan. For plans starting in 2023, the credit is increased to 100% of administrative costs and ranges from $500 to $5,000. In addition, there is an additional 100% credit of up to $1,000 per employee for employer contributions made for employees earning less than $100,000 during the plan’s first year. This credit decreases by 25% each of the following 3 years. Employers with 51-100 qualifying employees can qualify for a similar, but lesser, credit for employer contributions that remains subject to the original SECURE Act provisions.
• Employer Match for Student Loan Payments – Starting in 2024, employers will now be eligible to deposit a matching contribution in a student’s retirement account based on the amount of student loan payments made.
• Required Minimum Distributions – For qualified employer Roth plan accounts, RMDs will be eliminated in 2024, putting Roth 401(k) plans on the same footing as Roth IRAs.
• SIMPLE Plans Updates – Beginning in 2024, employers can make non-elective contributions to SIMPLE plans beyond what has already been established (2% of compensation or 3% of employee deferrals). The new additional compensation can be up to $5,000 (indexed with inflation) or 10% of compensation, whichever amount is lower.  Employers can also replace SIMPLE IRA plans with a SIMPLE 401(k) plan that makes employer contributions mandatory. In addition, the annual deferral limit and the catch-up contribution at age 50 are increased by 10% percent 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 provides a 4% matching contribution or a 3% employer contribution.
• Automatic Rollovers – If an employee has a default IRA set up as part of a plan with a former employer, the new employer can transfer amounts unless the participant opts out. This will go into action on or after 12 months past the enactment of the new SECURE Act – the very end of December 2023. With these employer-initiated transfers, the upper limit changes from $5,000 to $7,000. In order to move the money, the balance needs to be at least $1,000.
• Emergency Savings Accounts – Starting in 2024, employees who are not highly compensated will be eligible to receive emergency savings accounts in the form of a retirement plan. Automatic enrollment cannot surpass 3% of an employee’s salary, and employee contribution must be capped at $2,500. When an employee leaves, the account can be taken as cash or rolled over into a Roth-defined contribution plan or IRA. Withdrawals are allowed at least once a month at the participant’s discretion. Such distributions will not be subject to a 10% additional tax for early withdrawals.
• Correcting Errors– Effective for errors that occur after December 31, 2023, employers will have a 9 ½-month grace period after the plan year ends to fix any automatic enrollment or escalation mistakes. Once corrected, they must inform employees of the mistake within 45 days.
• Separated Top-Heavy Test – Effective for plan years beginning after December 31, 2023, the top-heavy test (testing to see whether owners and highest-paid employees own more than 60% of the plan asset value) can now be separated by excludable and non-excludable employees. This can help prevent employers from failing top-heavy testing by making these separations and will also help them encourage employees under 21 to start saving for retirement.
• Catch-Up Contributions – For those aged 50 or older, the retirement plan contribution limit is increased (“catch-up contributions”). For 2023, the catch-up contribution amount is limited to $7,500 for most retirement plans and is subject to inflation increases.

SECURE 2.0 provides a second increase in the contribution amount for those aged 60, 61, 62, or 63, effective for tax years after 2024. For most plans, this “second” catch-up limitation is $10,000, and $5,000 for SIMPLE plans. These limitations are subject to inflation adjustments like the “standard” catch-up amounts.

The annual limit on contributions to individual retirement accounts (IRAs) is also increased for participants aged 50 and older. The “catch-up” limit for IRAs is $1,000. Unlike the catch-up amount for other plans, this amount is not subject to increases for inflation under current law. The bill would make the IRA catch-up amount adjusted annually for inflation for tax years beginning after 2023.

Finally, for tax years beginning after 2023, all catch-up contributions are subject to Roth (i.e., after-tax) rules rather than only where allowed by the plan in which the individual participates.

• Part-Time Workers – Beginning in 2025, long-time part-time workers will be able to participate in employer-sponsored plans if they have completed two years of service with at least 500 hours worked. This is a decrease from the previous rule, which required 3 years of service.
• Participants Database – SECURE 2.0 creates a national online searchable database to enable employers to locate “missing” plan participants and plan individuals to locate retirement funds.

We’re here to help

The changes outlined in the SECURE Act 2.0 are designed to make retirement savings easier for families and individuals. However, there are several new changes and provisions with different effective dates that companies need to consider. If you have questions about the information outlined above or need assistance with your next plan audit, JLK Rosenberger can help. For additional information, call 818-334-8645 or click here to contact us. We look forward to speaking with you soon.