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The SECURE Act 2.0 (the Act) was signed into law at the end of 2022. Passed as part of the Consolidated Appropriations Act of 2023, it calls for a bevy of changes to the current retirement plan and savings rules. The purpose is to make it easier for workers to gain access to and participate in employer-sponsored retirement plans. At the same time, new and enhanced incentives are available to certain employers for qualifying activities. Since dozens of changes will be implemented over the coming years, it is essential to become familiar with those impacting plans in 2023. (If you’re looking ahead to 2024, you can view those changes here.) To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
Changes Effective in 2023
- Small Financial Incentive – Employers are now allowed to provide employees with a small financial incentive to participate in the company’s retirement plan. One example provided was a small dollar gift card, but no additional guidance has been published. While not addressed in SECURE 2.0, employers considering such small financial incentives should also consider whether the financial incentive itself could be deemed taxable income. Pending further IRS guidance on this topic, it is likely that the financial incentive would be taxable in many cases.
- Increase in RMD Age – Building upon previous changes, there is now an increase in the minimum age when participants must take Required Minimum Distributions (RMDs). Individuals who reached age 72 prior to 2023 will remain subject to previous rules. However, the minimum age will increase to 73 in 2023 and to 75 in 2033.
- RMD Penalty Reduction – Under prior rules, there was a 50% excise tax due on any funds required to be taken as an RMD but were not. The SECURE Act 2.0 reduced the penalty rate to 25% and reduced it to 10% if the participant corrects the issue within a two-year period. This change will lead to significant savings for those who have made errors with RMDs.
- Pooled Employer Plan (PEP) Modifications – A PEP consists of multiple employers participating in one group plan. Typically, these companies are from a similar industry or with similar service offerings. The Act made two changes impacting these plan types. First, PEPs are now permitted to designate a named fiduciary that is not a plan employer to manage contribution collection. The fiduciary is required to outline collection processes in writing. Second, the “one bad apple” rule allows more flexibility. When one employer violates the rules, the other employers will no longer receive different tax treatment.
- Hardship Self Certification – A plan participant may need to take a hardship withdrawal to meet an immediate and heavy financial need. Under prior regulations, participants were required to present certain evidence to take the distribution. SECURE Act 2.0 changed this to allow an employee to self-certify that a hardship exists and that the amount of the distribution does not exceed actual needs.
- Unenrolled Participant Notifications – Currently, employees who elect not to participate in a workplace retirement plan are required to receive notifications about various activities, changes, and deadlines. SECURE Act 2.0 reduced the amount of communication to only an annual notice of eligibility to participate during the enrollment period.
- Small Business Start-Up Credit – The value of this credit has been increased. The rules have been loosened to allow employers with up to 50 employees to claim 100% of eligible start-up costs. The credit remains 50% for employers with 51-100 employees. Additional credit may be available based on the amount of employer contributions of up to $1,000 per employee. This additional credit phases out over five years for employers with 51-100 employees. The start-up credits are available for three years to employers that join an existing MEP, regardless of how long the plan has existed. The MEP rule is retroactively effective for taxable years beginning after December 31, 2019. This modification is designed to reduce the employer’s financial burden when starting a plan.
- Military Spouse Plan Eligibility Credit – Under the new changes, small employers will receive a tax credit if they allow spouses of military personnel to participate in the company’s retirement plan within two months of the hire date. The credit value is equal to $200 per eligible spouse and 100% of employer contributions made for a $500 maximum credit.
- Disaster Zones – Under new rules, a maximum of $22,000 in distributions is possible for individuals residing in a federally declared disaster zone. It is important to note that this amount is not subject to the 10% early withdrawal tax. The amount is taxed over three years, and an employer may elect to change the maximum amount and payback period as desired. Plans can also increase the affected participant’s loan limit to $100,000 (vs. the $50,000 loan limit) or the participant’s vested account balance. Also, if the affected participant has a non-disaster plan loan outstanding, the repayment period can be extended by one year. These changes apply to disasters that occurred after January 26, 2021.
- Roth Matching and Nonelective Contributions – Effective immediately, employers may permit participants to elect matching or nonelective contributions as Roth (after-tax) contributions, thereby resulting in taxable income to the participant. Prior to SECURE 2.0, employers had to make matching and nonelective contributions on a pre-tax basis. Employer contributions designated as Roth contributions must be immediately 100% vested (i.e., cannot be subject to forfeiture).
- Auditor’s Report for “Group of Plans” – Effective December 29, 2022, plans that file a single Form 5500 as a “group of plans” must submit an auditor’s opinion if any plan in the group, individually, has 100 participants or more at the beginning of the plan year. The auditor’s report will relate only to each individual plan that would otherwise be subject to an independent accountant’s report.
- SIMPLE and Simplified Employee Pension (SEP) Roth IRAs – Effective for taxable years beginning after December 31, 2022, SIMPLE IRAs can accept Roth contributions.
- SEPs for Domestic Workers – Effective for tax years beginning after December 29, 2022, employers of domestic employees (nannies, housekeepers, etc.) can provide retirement benefits for those employees under a SEP. Previously, employers were not permitted to offer domestic employees a workplace retirement plan because the employer was not engaged in a trade or business.
The SECURE Act 2.0 ushered in several changes designed to make plan administration and retirement savings easier for all involved. It is important to consult with a qualified advisor to determine how your plan will be impacted. If you have questions about the information outlined above or need assistance with your retirement 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.