Exploring Secure 2.0 – The New Landmark Retirement Legislation
For individuals who need incentive when it comes to saving for retirement, Congress recently passed a landmark legislation for retirement, which is being referred to as Secure 2.0. These new laws will be paramount for small business owners and employers alike, increasing their access to workplace retirement benefits.
In this blog post we will go over what the benefits of this new legislation will be, as well as the top ten provisions that we will see in the near future.
1. The Enhancement of Tax Credits For Small Businesses That Are Starting and Maintaining a Retirement Plan
For small businesses that adopt a new qualified retirement plan, the tax credit that is currently available will be enhanced at the start of 2023. For employers that have 50 employees or less, they will be eligible for a credit that is equal to 100% of the amount that they contributed, and up to $1,000 for each employee. In the first and second year, the credit that employers will receive will equal 100%. After three years, the credit will be reduced to 75%; after four years to 50%; after five years to 25%.
For those small businesses that have 51 to 100 employees, their eligibility for this tax credit will be phased out depending on the number of employees over 50 at the start of the next taxable year. Excluded individuals include employees who earn more than $100,000 per year and there are no credits that can be claimed by employers on their behalf.
Looking at the current three-year credit for start-ups, their plan will be extended to include an increase of 100% of plan expenses, which is capped at $5,000 for employers with 50 employees or less.
2. Required Minimum Distribution Changes
Starting this year, the age of Required Minimum Distributions will be increased from 72 to 73 and then again to 75 in 2033. For individuals who fail to take the minimum distribution from 50% to 25%, their penalty taxes will be reduced. This tax will also be reduced from 25% to 10% if the failure is corrected in a timely manner.
3. Changes For Earners Over $145,000 and Increases For Catch-Up Contributions
In regards to catch-up contributions layed out in Secure 2.0, there are two significant adjustments. First, starting in the year 2024, catch-up contributions must be made on a Roth, or after tax basis for individuals who earn more than $145,000 per year (indexed). This ruling does not apply to SIMPLE plans.
Then, starting in 2025, in order to be eligible for an increased limit of catch-up contributions you must be between the ages of 60 to 63. Currently, catch-up limitations have been limited to $7,500, excluding SIMPLE plans whose limits are at $3,500. Additionally, individuals will have the opportunity to contribute either $10,000 (indexed) or 150% of the regular catch-up contribution, whichever is greater. In the year 2023, this amount will add up to $11,250 (indexed).
For individuals on SIMPLE plans, their contributions will be either $5,000 or 150% of the regular SIMPLE catch-up contributions, whichever is greater. In the year 2023, this amount will add up to $5,520 in 2023.
4. Ability To Self-Correct Inadvertent Plan and IRA Violations Without Having To Submit To The IRS
Under the IRS’ Employee Plans Compliance Resolution System (EPCRS), effective immediately, any plan violations that are made inadvertently will be allowed to be self-corrected without having to submit them to the IRS. If the IRS discovers any violations on an audit, or if the correction is not fixed within a reasonable period once it is identified, this ruling will not apply.
5. Allowing Matched Contributions For Student Loan Payments
For individuals with student loan debt, it can be difficult for them to contribute any amount to their workplace retirement plans. This was recognized by Secure 2.0 which will now include provisions aimed at enticing these workers to start saving for retirement. Based on an individual’s student loan payments, employers will be permitted to make matching contributions under a 401(k), 403(b) or SIMPLE IRA plan, starting in 2024.
The same will apply to government employers in a section 457(b) plan or similar plan with respect to their employees student loan payments. For government employers, this will also be effective in 2024.
6. Auto-Enrollment and Auto Escalation Will Be Required For Most New Plans
Automatic enrollment will be required for any new 401(k) and 403(b) plans for all participants that are eligible, at a minimum of 3% and maximum of 10% of their eligible compensation. One percentage point per year will be automatically escalated, up to at least 10% with a maximum of 15%. To be grandfathered in and not subject to these requirements, you must have a plan that existed before the date of enactment.
In order to be exempt from these changes, you must have a government plan, church plan, be an employer with no more than 10 employees, or have a new business within its first three years of operation. This new bill applies only to employers that are deciding to start a new plan, and does not require employers to have a plan.
7. Contributions From SIMPLE and SEP Will Be Allowed To Be Made On a Roth Basis
Contributions that are made by SIMPLE and SEP, will be allowed to be made on a Roth basis, for both employer and employee. This ruling is effective starting in the 2024 tax year and Roth treatment must be elected specifically by the employee.
8. Through a 401(k) Plan There Will Be Two New Ways To Save For Emergencies
Employees with 401(k) plans will be able to create emergency savings accounts and make withdrawals without penalty. The withdrawal amount on the emergency savings account will be capped at $2,500. Starting in 2024, distributions will be made nontaxable when contributions are made on a Roth basis, regardless of when it is distributed. Employers must match contributions into the standard portion of the plan at the same rate they match regular contributions to the plan. This excludes the emergency savings account portion of the plan, which can only receive contributions by the employee.
This plan was created by policymakers who intend to support individuals that are looking to save but are worried about accessing funds that are tied up in a retirement account, during an emergency and being unable to access those funds without penalty.
Effective starting 2024, emergency distributions from retirement plans (excluding DB plans) or IRAs will no longer be subject to an early 10% distribution tax. There are restrictions to this which include a limit of one emergency distribution that is allowed per year which cannot exceed less than $1,000 (not indexed) or the excess of the individual’s vested benefit over $1,000 (not indexed).
9. All Employers Will Be Permitted To Offer Contributions To Their Employees On a Roth Basis
Starting immediately, under an employer’s 401(k), 403(b) or governmental 457(b) plan, employees will be allowed to elect for some or all of their vested matching and non-elective contributions to be treated as Roth contributions.
10. Excess 529 Assets Will Be Rolled Over To Roth IRA’s
Excess assets that are already in a 529 qualified tuition program will be eligible for rollovers that are tax-free to a Roth IRA account. In regards to the 529 account and IRA account, the beneficiary must be the same for each account and must have maintained the account for a minimum of 15 years. In order to be subject to the lesser amount, the rollover must be either within the regular Roth IRA limits (without the income limits) or the total amount that has been contributed over the last five years to the 529 account (plus earnings). Rollovers will be subjected to a per-beneficiary lifetime limit of $35,000.
This is intended to support individuals with middle income who, instead of saving for their own retirement, have been making contributions to a 529 plan.
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At Bridge Benefits, we specialize in optimizing retirement and benefit plans for your workplace. We offer cost effective solutions for small, medium and large businesses, as well as, non-profit organizations. With over 40 years of combined experience, you can rely on the professionals at Bridge Benefits to provide you with a customized plan to pursue all of your needs.
Contact us today to learn more about how our customized programs can benefit your workplace.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.