SECURE 2.0 Act Highlights – Employers Take Notice

The SECURE 2.0 Act of 2022 adopted significant changes to how 401(k) and other qualified retirement savings plans must operate, starting in 2023 and continuing to add new provisions in 2025 and beyond. We’ll take a look at several highlights of this Act, and help employers determine which provisions they must implement and which are optional items they may want to consider.

Automatic Enrollment for New Plans (Mandatory)

Section 101 of SECURE 2.0 requires that all new 401(k) and 403(b) plans institute automatic enrollment beginning in 2025. The initial enrollment percentage of compensation must be at least 3 percent and no more than 10 percent.

SECURE 2.0 also requires annual automatic increases of 1 percent until the automatic elective contribution amount reaches at least 10 percent, but is permitted to continue increasing by the same amount up to no more than 15 percent of compensation.

There is an exception for small businesses with 10 or fewer employees, new businesses (i.e., those that have been in business for less than 3 years), church plans, and governmental plans.

Plans established prior to December 29, 2022, the date that SECURE 2.0 Act was signed into law, are grandfathered and do not require automatic enrollment provisions in the plan.

Of course, employees may affirmatively opt-out of this enrollment and automatic increase percentages, but must do so affirmatively. Without an affirmative election, the employee is subject to the enrollment percentage and increases above. Think “opt-out” rather than the more-traditional “opt-in.”

Quicker Eligibility for Long-Term Part-Time Employees (Mandatory)

SECURE 1.0 granted long-term, part-time workers (LTPT) eligibility for a 401(k) plan’s elective deferrals if they met a requirement of at least 500 hours in a 12-month period of time for at least three consecutive years.

The SECURE 2.0 Act reduced the three-year requirement down to two-years, effective for taxable years beginning in 2025. While eligibility for LTPTs is mandatory strictly for allowing 401(k) elective deferrals only, and ADP/ACP nondiscrimination testing for LTPTs can optionally be separate from non-LTPTs, some plans may want to consider providing retirement plan contributions to this group as well.

Roth Catch-Up Requirement for High Earners (Mandatory)

SECURE 2.0 now requires that any Roth catch-up contributions made for those earning $145,000 or more annually (indexed over time) must be made on a Roth basis. Regulations on this new provision indicate that if a 401(k) or 403(b) plan does not have Roth provisions, then only those earning less than $145,000 may make catch-up contributions. For the minority of retirement savings plans that don’t currently provide Roth contributions, this may be a good reason to consider adding it in 2025.

New “Super” Catch-Up Contributions Provisions (Optional)

SECURE 2.0 added a provision that higher catch-up contributions can be made by participants who are aged 60 through 63 in that calendar year. The new “super” catch-up amount is the greater of $10,000 or 50 percent more than the “regular” catch-up amount for that plan year. In 2025, “regular” catch-up is capped at $7,500, so “super” catch-up is capped at $11,250.

Employer Contributions Can Now Be Roth-ified by Participants (Optional)

If a plan so chooses, SECURE 2.0 now allows participants to select whether to receive matching and nonelective employer contributions in Roth accounts. Previously, all employer contributions to a plan were tax-deferred. There are many plan design and plan administration considerations as to whether employers should adopt this provision in their plans or not.

Student Loan Matches (Optional)

A new optional provision that employers can adopt is to match not just employees’ elective deferrals in a 401(k) or 403(b) plan, but to also provide a match to employees who make qualified student loan repayments. The match is calculated as if the student loan repayment was an elective deferral. A qualified payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee, or in the case of a tax dependent, paying student loan debt that the employees themselves are contractually obligated to pay.

The SECURE 2.0 Act also provides that an employer can optionally test for nondiscrimination separately for student loan matches and for traditional matches of elective deferrals.

Employers might consider this option if they recruit or wish to retain employees right out of higher education who might have substantial loan payments and thus might be unable to make elective contributions to their employer’s plan.

Required Minimum Distribution (RMD) Rule Changes (Mandatory)

SECURE 2.0 made many significant changes to RMDs. The RMD starting age increased from 72 to 73 effective in 2023. It rises again to age 75 in 2033. The penalty for not taking an RMD decreases from 50 percent to 10 percent if the failure is corrected timely, and to 25 percent otherwise.

There is no longer a pre-death Roth RMD requirement effective starting in 2024. A surviving spouse may elect to be treated as the deceased employee for RMD purposes beginning in 2024.

Cash-Outs of Small Balances (Optional)

Plans can automatically cash out terminated participants with a balance of $1,000 or less. Prior to the SECURE 2.0 Act, plans could rollover a participant’s account to an IRA if it was between $1,000 and $5,000 without the participant’s consent.

SECURE 2.0 raises that limit to $7,000. Employers may wish to consider whether to add that provision to their plan to keep the participant count down, especially those hovering around 100 participants, when a plan audit is required each year.

Hardship Withdrawal Certifications (Optional)

Previously, employers were required to determine if a request for a hardship withdrawal qualified under the law and regulations. SECURE 2.0 now allows employers to optionally adopt a provision enabling participants to self-certify that they have a hardship in order to get a distribution.

Qualified Birth or Adoption Distribution (QBAD) Repayments (Optional)

QBADs allowed for repayments to the plan. The SECURE 2.0 Act limits the repayment period to no more than three years.

Small Employer Tax Credits (Optional)

Employers with 50 or fewer employees will now receive a 100 percent tax credit (up from the previous 50 percent) for starting a new eligible retirement plan such as a 401(k). In addition, if the employer makes its own contributions to the plan—such as through a safe harbor or discretionary contribution—that employer will receive an additional tax credit of up to $1,000 per employee.

Summary

There’s a lot to unpack in the SECURE 2.0 Act. If you have any questions about how this could affect your retirement savings accounts, early distributions, matching contributions, or anything else, we encourage you to contact Kushner & Company to learn more.