The Consolidated Appropriations Act, 2023, which includes the SECURE Act, 2.0 was signed into law on December 29, 2022. The SECURE Act 2.0 is designed to build upon the provisions of the original SECURE Act to expand participation and boost retirement savings. In part, the SECURE Act 2.0 does this by helping to ensure that small employers can easily and efficiently sponsor plans for employees by enhancing various credits to make saving for retirement beneficial to both plan participants and plan sponsors.
One of the most broadly applicable provisions requires that effective for plan years beginning after 2024, 401(k) and 403(b) sponsors automatically enroll employees in plans once they become eligible to participate. Under the requirement, the amount at which employees are automatically enrolled cannot be any less than 3 percent and no more than 10 percent of salary. The amount of employee contributions is increased by 1 percent every year after automatic enrollment, increasing to at least 10 percent, but not more than 15 percent of salary. Employees can opt-out of the automatic enrollment if they choose or make contributions at a different percentage.
Under the original SECURE Act, a small employer that establishes an eligible plan can claim a credit calculated as a percentage of start-up costs for the first three years. Under SECURE Act 2.0, effective for tax years beginning after 2022, the length of time for which the credit can be claimed is extended to five years for employers with 50 or fewer employees and the amount of the credit is increased with a cap of $1,000 per employee. The 100 percent credit amount is phased-out for employers with 51 to 100 employees and drops incrementally to 25 percent in the fifth year.
In addition, the SECURE Act 2.0 retroactively makes the start-up credit available to small employers that join a multiple employer plan (MEP) that is already in existence. Without this fix, the small employer would not be eligible for the credit if the MEP had been in existence for three years. The fix is effective for tax years beginning after 2019.
For retirement plan participants aged 50 or older, the contribution limitation increased and is now subject to annual inflation adjustments. For 2023, the amount of the catch-up contribution is $7,500 for most retirement plans and $3,500 for SIMPLE plans. Under the SECURE Act 2.0, a second increase in the contribution amount is available for participants aged 60, 61, 62, and 63, effective for tax years after 2024. For most plans, this “second” catch-up limitation is the greater of $10,000 ($5,000 for SIMPLE plans) or 150 percent of the catch-up contribution for participants not aged 60 through 63.
Under current law, catch-up contributions to a qualified retirement plan can be made on a pre-tax or Roth basis (if permitted by the plan sponsor). For tax years beginning after December 31, 2023, the SECURE Act 2.0 provides that all catch-up contributions to qualified retirement plans are subject to Roth tax treatment.
Required Minimum Distributions
Under the original SECURE Act, plan participants are required to begin taking required minimum distributions (“RMDs”) at age 72. Under the SECURE Act 2.0, the age at which participants must begin taking distributions is increased over a period of ten years. The age is increased to 73 for individuals who attain age 72 after December 31, 2022, and age 73 before January 1, 2033. The age at which participants must begin taking RMDs is further increased to 75 for individuals who attain age 74 after December 31, 2032. The increased age for RMDs is effective for tax years beginning after 2022.
The above information highlights the most significant changes to employer-sponsored retirement plans under the provisions of the SECURE Act 2.0 For more information relative to these changes, please contact Michael P. Zeoli, Jr., CPA, Manager, at 716.438.2190 or firstname.lastname@example.org; or your Tronconi Segarra & Associates tax advisor.