SECURE Act 2.0: What Employers & Participants Need to Know

What is SECURE Act 2.0?

The SECURE 2.0 Act of 2022 expands on the original Setting Every Community Up for Retirement Enhancement Act of 2019, which sought to help employers and employees better plan for retirement. It is part of the Consolidated Appropriations Act of 2023 and implements a slew of provisions affecting policies like required minimum distributions and student loan repayment matching.

What Changes Can We Expect From SECURE 2.0?

The amendments to the SECURE Act will impact how employees with employer-sponsored retirement accounts save for retirement and repay student debt. Other provisions will make it easier to better prepare for emergencies by providing employees with an emergency plan connected to their Roth accounts. The SECURE Act 2.0 provides several key takeaways for both employers and employees as they prepare for retirement.

Expanding Tax Credits for Employers

The SECURE Act 2.0 expands potential employer tax credits from 50% to 100% of the employer’s retirement plan start-up costs which is capped at $5,000 annually. Employers with 50 or fewer employees can claim this enhanced credit for each of the first three years of their plan. Employers with 51-100 employees continue to be eligible for the 50% tax credit. In addition, employers with less than 100 employees are eligible for an additional tax credit for certain employer contributions.

Enhanced Saver’s Match

Modified from the original Saver’s Credit, a Saver’s Match is a federal contribution given to eligible low-income employees’ IRAs or retirement accounts beginning in 2027. The previous provision allowed lower-income employees who contribute to retirement accounts to get a tax reduction of up to $1,000 per year. This enhanced match will be 50% of the employee’s retirement account contributions up to $2,000 per year.

Instead of having the amount reduced from their tax bill, employees with retirement accounts will receive government-issued matching contributions deposited into the retirement account of their choice. However, it can’t be placed into a Roth Account. Additionally, if the matching amount is less than $100, the amount will be treated as a refundable tax credit.

Simple IRA to Safe Harbor 401K Option

SIMPLE IRAs (Individual Retirement Accounts) are cost-effective plans. Previously, employers could not terminate these plans before the end of the year. However, the new legislation allows an employer to terminate a SIMPLE IRA plan midyear and adopt a SIMPLE 401(k) or Safe Harbor 401(k) plan which offers higher employee contribution limits, catch-up contributions, and a lower taxable income.

Required Minimum Distribution Age & Rates

A required minimum distribution (RMD) is the minimum amount you must withdraw from your retirement account annually. Previously, the minimum age for withdrawing RMDs was 72. The SECURE Act 2.0 increases this age to 73. The penalty for not taking an RMD in a timely manner was decreased from 50% to 25%. Raising the age of RMDs allows more time for the funds to mature, tax-free.

Increased Catch-Up Contributions

Currently, individuals aged 50 and older can make catch-up contributions of $7,500, up from $6,500. In addition, starting on January 1, 2025, individuals between the ages of 60 and 63 can make catch-up contributions of up to $10,000 annually to a workplace retirement plan.
Additionally, the SECURE Act 2.0 also requires that all individuals earning over $145,000 per year make their catch-up contributions after taxes. In early 2024, catch-up contributions to IRAs which are limited to $1,000 will be adjusted for inflation in increments of $100.

Modifications for Qualified Charitable Distributions (QCDs)

Today, those who are 70 1/2 years of age or older can direct up to $50,000 as a one-time qualified charitable distribution from an IRA to a charitable unit trust, a charitable remainder annuity trust, or a charitable gift annuity. The QCD limit will increase with inflation and must come directly from your IRA by the end of the calendar year.

Changes to Qualified Longevity Annuity Contracts

Qualified longevity annuity contract premiums increase from $145,000 to $200,000 effective January 2023. Moreover, the SECURE Act 2.0 eliminates the prior requirement that limits premiums to 25% of an employee’s retirement account balance.

Added Roth Account Matching

Starting immediately, employers may offer plans that allow employees to have employer-matching contributions made on a Roth (after-tax) basis. This will allow employee funds to mature over time, and account holders will not pay taxes on distributions upon retirement.

Note: Roth account matching will be available depending on plan documents.

Automatic Enrollment in Employer 401(k) Plans

As of 2025, certain employers adopting a new 401(k) plan will be required to include automatic enrollments for all eligible employees. The employees will be enrolled at a default deferral rate of 3%. Employees who do not want to take advantage of this option may opt out.

Long Term, Part-Time Employee 401(k) plan eligibility

The previous SECURE Act of 2019 required at least 500 hours per year for three consecutive years for a part-time employee to be eligible to enroll in a company-sponsored 401(k) plan. Starting in 2025, qualified part-time employees will be eligible to enroll after they have worked a at least 500 hours per year for two consecutive years.

Matching Student Loan Payments

Many future retirees find themselves burdened by student loan debt. This can make it more challenging to save for retirement and financial emergencies. However, starting in 2024, employers may choose to make matching student loan contributions to employee 401(k) accounts. The employees must be making qualified student loan payments to be eligible for this benefit.

Roll Over 529 Plans

Currently, leftover funds in a 529 education fund account are subject to income tax and a 10% penalty. However, beginning in 2024, employees can roll over up to $35,000 from their 529 plan into a Roth IRA if the 529 plan has been in place for over 15 years. After this time, the funds may also roll over to a beneficiary.

New Emergency Savings Account

Beginning in 2024, employers can offer an emergency savings account, linked to their retirement account, in the form of a Roth account to non-highly compensated employees. The first four withdrawals will be tax and penalty-free. The emergency savings account balance is capped at $2,500. These contributions may also qualify for employer matching.