On December 23, 2022 Congress passed—and the President signed on December 29, 2022— the Consolidated Appropriations Act, 2023 (the Appropriations Act). The Appropriations Act includes what is referred to as the SECURE 2.0 Act of 2022 (SECURE 2.0). The SECURE 2.0 legislation may affect how you plan for your retirement.
Unfortunately, the provisions of SECURE 2.0 have various effective dates, which means now is the time to consider how these new rules may affect your tax and retirement-planning situation. However, when planning under SECURE 2.0 clients, financial advisers and tax professionals must pay close attention to the effective dates. For example, some of the changes in SECURE 2.0 are effective beginning many years from now.
Here are some of the more important elements of SECURE 2.0 that impact individuals.
Expanding automatic enrollment in retirement plans. SECURE 2.0 requires 401(k) and 403(b) plans to automatically enroll participants in the respective plans upon becoming eligible (and the employees may opt out of coverage). The initial automatic enrollment amount is at least 3 percent but not more than 10 percent. Each year thereafter that amount is increased by 1 percent until it reaches at least 10 percent, but not more than 15 percent. All current 401(k) and 403(b) plans are grandfathered. 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.
Effective for plan years beginning after December 31, 2024.
Saver’s Match. SECURE 2.0 repeals and replaces the current credit with respect to IRA and retirement plan contributions, changing it from a credit paid in cash as part of a tax refund into a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan. The match is 50 percent of IRA or retirement plan contributions up to $2,000 per individual. The match phases out between $41,000 and $71,000 in the case of taxpayers filing a joint return.
Effective for taxable years beginning after December 31, 2026.
Increase in age for required beginning date for mandatory distributions. Under current law, participants are generally required to begin taking distributions from their retirement plans at age 72. The SECURE Act of 2019 increased the required minimum distribution age to 72. SECURE 2.0 further increases the required minimum distribution age to 73 starting on January 1, 2023 – and increases the age further to 75 starting on January 1, 2033. The provisions are applicable as follows: In the case of an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033, the required beginning date age is 73. In addition, in the case of an individual who attains age 74 after December 31, 2032, the required beginning date age is 75.
The amendments made by this section shall apply to distributions required to be made after December 31, 2022, with respect to individuals who attain age 72 after such date.
Indexing IRA catch-up limit. Under current law, the limit on IRA contributions is increased by $1,000 (not indexed) for individuals who have attained age 50. SECURE 2.0 indexes such limit for the cost-of-living adjustments.
Effective for taxable years beginning after December 31, 2023.
Higher catch-up limit to apply at age 60, 61, 62, and 63. Under current law, employees who have attained age 50 are permitted to make catch-up contributions under a retirement plan in excess of the otherwise applicable limits. The limit on catch-up contributions for 2022 is $6,500, except in the case of SIMPLE plans for which the limit is $3,000.
SECURE 2.0 increases these limits to the greater of $10,000 or 50 percent more than the regular catch-up amount in 2025 for individuals who have attained ages 60, 61, 62 and 63. The increased amounts are indexed for inflation after 2025.
Effective for taxable years beginning after December 31, 2024.
Treatment of student loan payments as elective deferrals for purposes of matching contributions. SECURE 2.0 is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt, and thus are missing out on available matching contributions for retirement plans. SECURE 2.0 allows such employees to receive those matching contributions by reason of repaying their student loans. SECURE 2.0 permits an employer to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to “qualified student loan payments.” A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.
Effective for contributions made for plan years beginning after December 31, 2023.
Deferral of tax for certain sales of employer stock to employee stock ownership plan sponsored by S corporation. Under section 1042 of the Internal Revenue Code (“Code”), an individual owner of stock in a non-publicly traded C corporation that sponsors an employee stock ownership plan (“ESOP”) may elect to defer the recognition of gain from the sale of such stock to the ESOP if the seller reinvests the sales proceeds into qualified replacement property, such as stock or other securities issued by a U.S. operating corporation. After the sale, the ESOP must own at least 30 percent of the employer corporation’s stock. SECURE 2.0 expands the gain deferral provisions of Code section 1042 with a 10 percent limit on the deferral to sales of employer stock to S corporation ESOPs.
Effective for sales made after December 31, 2027.
Qualifying longevity annuity contracts. In 2014, the Treasury Department published final regulations on qualifying longevity annuity contracts (“QLACs”). QLACs are generally deferred annuities that begin payment at the end of an individual’s life expectancy. Because payments start so late, QLACs are an inexpensive way for retirees to hedge the risk of outliving their savings in defined contribution plans and IRAs. SECURE 2.0 repeals the 25 percent limit and allows up to $200,000 (indexed) to be used from an account balance to purchase a QLAC.
Effective generally for contracts purchased or received in an exchange on or after the date of enactment.
Reduction in excise tax on certain accumulations in qualified retirement plans. SECURE 2.0 reduces the penalty for failure to take required minimum distributions from 50 to 25 percent. Further, if a failure to take a required minimum distribution from an IRA is corrected in a timely manner, as defined under SECURE 2.0, the excise tax on the failure is further reduced from 25 percent to 10 percent.
Effective for taxable years beginning after the date of enactment.
One-time election for qualified charitable distribution to split-interest entity; increase in qualified charitable distribution limitation. SECURE 2.0 expands the IRA charitable distribution provision to allow for a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts, effective for distributions made in taxable years beginning after the date of enactment.
SECURE 2.0 also indexes for inflation the annual IRA charitable distribution limit of $100,000, effective for distributions made in taxable years ending after the date of enactment.
The foregoing represents some of SECURE 2.0’s significant changes that may affect your current retirement and/or estate plans. Please contact us if you have questions regarding SECURE 2.0.