The SECURE 2.0 Act that Congress passed in December as part of the omnibus spending bill contains a dizzying array of provisions related to retirement savings accounts and distributions that will likely affect the planning for accounting and tax clients.
A number of provisions take effect this year, while others phase in over the next five years (see story). Some of the changes involve required minimum distributions, enhanced catch-up contributions, automatic employee enrollment, and penalty-free access to retirement accounts for emergencies. Changes involve 401(k), 403(b), IRA and even 529 savings accounts. It builds on the earlier Securing a Strong Retirement Act passed by Congress in December 2019.
“It was a large piece of legislation,” said Brian Ream, a managing principal at CliftonLarsonAllen. “There were three separate retirement bills in different iterations floating around the halls of Congress. In this day and age of our polarized political environment, this was a refreshing piece of bipartisan [legislation] coming together. They were able to combine provisions from each of the three bills and bundle them into what we’re now calling SECURE 2.0. A lot of this is add ons, revisions and enhancements to the original SECURE Act from 2019. By my count there are about 27 different enhancements or additions. The nice thing is, there’s a little something in there for everybody.”
RMD age change
Among them are enhanced benefits for employers, especially smaller employers looking to potentially start up a retirement benefit for employees, along with enhancements for current participants. One of the most talked about provisions involves increasing the age to 73 for required minimum distributions from retirement plan accounts after the end of this year.
“Post December 31, you don’t have to begin taking required distributions until age 73,” said Ream. “Hopefully, that’s going to be able to help stretch those savings for the retiree in a 401(k). if they’re able to potentially let that grow a little bit longer.”
The original SECURE Act had increased the RMD age from 70 ½ to 72, and the new law will increase it to 73 for 2023, and eventually 75 in 2033.
“We’re living longer, and the projection is that by 2033, in 10 years, that RMD age is going to push up to age 75,” said Ream. “As life expectancies continue to grow, we’re extending that runway a little further out into the future, as far as when you have to take a distribution. Hopefully that allows for more growth.”
One expert warns, however, that waiting until age 75 to take RMDs could backfire. “For most middle-class people, this is likely to raise your lifetime taxes if you wait because you’re going to be pushing your tax loss of income into a smaller period of time, effectively pushing yourself into a higher tax bracket,” said Laurence Kotlikoff, an economics professor at Boston University who has developed a retirement planning program called MaxiFi. “We’re not just talking about income taxes, but about state income taxes, Social Security taxes, and Medicare Part D premiums.”
He believes it’s a bad idea to wait too long to take out RMDs. “That actually hurts some middle-class people,” said Kotlikoff. Rich people think it’s better to wait and it’s actually worse to wait in terms of your lifetime taxes. They push themselves into too high a Social Security bracket, too high a Medicare bracket, too high a federal income tax bracket, and too high a state income tax bracket. All these things can happen if you clump your withdrawals too close together over a few number of years.”
Starter 401(k) plans
The new law also provides extra incentives for small employers to provide retirement plans to their employees.
“As accountants, we have small employer clients, and they may have considered a 401(k) in the past,” said Ream. “There are a lot of incentives now to get a plan started, and on top of that, for a lot of small employers, there’s now an increased provision in there for part-time workers. Under the old rules, you had to work at least 500 hours for three consecutive years to be able to participate. They’ve knocked that down to two years now. That’s going to be important for a lot of seasonal employees.”
For example, a seasonal employee who worked for 500 hours over two summers would be able to start participating in a retirement plan offered by a business such as an ice cream shop or landscaping company. “That’s going to hopefully spur a lot more participation in plans,” said Ream.
The new law also includes incentives for startup businesses to set up retirement plans for their employees. Prior to SECURE 2.0, employers were able to deduct about 50% of their startup plan cost. Under the new law, that will increase to 100%.
“Hopefully, we’ll see more adoption of plans, being able to deduct 100% of those initial startup costs,” said Ream.
Similarly, the legislation includes provisions allowing businesses to set up a “starter 401(k) plan” if they didn’t previously offer a 401(k) plan. The law also makes it easier to set up such a plan by easing some of the traditional testing requirements. Plan sponsors usually are required by the IRS to test traditional 401(k) plans each year to ensure the contributions made by and for rank-and-file employees are proportional to contributions made for highly compensated employees like owners and managers. As the non-highly compensated rank-and-file employees save more for retirement, the rules allow highly compensated employees to defer more. Retirement plans are required to perform nondiscrimination tests for 401(k) plans known as Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests.
“The idea being that third-party administration costs, ADP testing, and all of the discrimination testing can be a bit onerous,” said Ream. “If we have a starter 401(k), there will be a deferral only, and those deferral limits are capped. But in exchange for some of the limitations around a starter 401(k), they will have been deemed to satisfy all of the nondiscrimination testing and are exempt from it. Again, they’re trying to basically ease some of the friction in getting plans and incentivizing a lot of smaller employers to make this a benefit for employees.”
The details of the regulations will still need to be worked out by the Internal Revenue Service and the Treasury and Labor departments.
“With any of these provisions, some of this has not been fully fleshed out,” said Ream. “We’re still getting a lot of opinions from regulatory agencies. But conceptually, that’s the direction things are going. We’re going to make it easier to start up a plan.”
He pointed to some of the other incentives tucked inside the new law for small companies. “A lot of these plans, especially in the 403(b) space, are going to now be able to participate in multiple-employer plans, MEPs, or pooled employer plans, as they’re sometimes known,” said Ream. “By being able to pool resources, like a collaborative, it should save on the expense side of getting the plan off the ground.”
A major change in SECURE 2.0 involves the increase in catchup contributions to retirement plans for those who realize they haven’t been contributing enough money to their accounts.
“The larger catchup contributions are a major piece,” said Ream. “Basically, this will kick in between ages 60 and 63. Under the old legislation, at 50, you can begin adding a catchup contribution. Now, from age 60 to 63, there’s going to be an additional 50% of your catchup that you’ll be eligible to catch up further. So if that catchup contribution was $7,500 in 2022, in addition to that $7,500, you’re able to contribute an additional $3,750. With just the employee deferral catch up and 50% kicker, an average participant would be able to contribute up to $33,750.”
There’s a caveat, however, as the change isn’t scheduled to take effect until 2025, but Ream believes the implications could still be significant for clients.
“I had a conversation with a 60-year-old individual and her friends are starting to talk about retirement and she was in a bit of a panic,” he said. “She was a little bit embarrassed that she’s starting late and wondering if she is ever going to be able to retire. Provisions like this are going to provide a lot more latitude to be able to start to put considerably more funds in there.”
For a 50- to 60-year old the existing catchup contribution limit of $1,000 that was in place for IRAs will now be indexed for inflation under SECURE 2.0. “We’ll start seeing that number creep higher as well,” said Ream. That provision will give those approaching retirement age gradually more opportunity to contribute more to their tax-deferred accounts from ages 50 to 60.
Emergency withdrawal provisions
SECURE 2.0 also includes some provisions allowing account holders to withdraw money from their retirement accounts in case of an emergency without worrying incurring a tax penalty for making an early withdrawal.
“Statistically, 42% of Americans have less than $1,000 in savings,” said Ream. “One of the main reasons that people don’t participate fully in the retirement benefit is because they’re living paycheck to paycheck. In the depths of the bill, there is what they’re calling an emergency rainy day provision, where in the event of an emergency, if my car breaks down or my appliance breaks, they’re going to allow an employee to pull up to $1,000 from the plan penalty free. If there’s an emergency, I know I have this rainy day fund, and I’ll be able to pull out without a 10% penalty.”
Similarly, up to $10,000 can be withdrawn penalty free by victims of domestic abuse. “If that’s the unfortunate situation, and somebody needs to relocate, or pick up and make a lifestyle change, you’ll be able to pull $10,000 out without penalty,” said Ream. “Up to $22,000 could be withdrawn if you were the victim of a California wildfire, or a hurricane, or a tornado. They’re providing a lot of escape hatches or abilities to tap into the source of funds in the event of some kind of emergency or personal setback. From a participant standpoint, by adding in more flexibility to accommodate unfortunate or unforeseen events, it helps remove some of those barriers to participation.”
Saver’s Credit enhancements
There’s also an enhanced Saver’s Credit for employer plans and IRAs. “Basically, it’s a government match,” said Ream. “For lower-income employees, if they make a contribution of let’s say $100 a week, they’ll actually get a Saver’s Credit match from the government, not the employer, but the U.S. government is going to come in and match that up to $2,000 a year. That’s both for Roth and traditional IRAs. There are going to be income limits attached to it, but this enhanced Saver’s Credit is actually going to provide a match to incentivize participation. It’s paid regardless of tax liability equal to 50% of the taxpayer’s qualified retirement contribution up to $2,000.”
Under prior law, there’s a nonrefundable credit for certain individuals who make contributions to individual retirement accounts, employer retirement plans (such as 401(k) plans), and ABLE accounts. SECURE 2.0 repeals and replaces the 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% 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 ($20,500 to $35,500 for single taxpayers and married filing separately; $30,750 to $53,250 for head of household filers), according to a Senate Finance Committee summary. It’s effective for tax years starting after Dec. 31, 2026.
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% but no more than 10%. Each year after that, the amount increases by 1% until it reaches at least 10%, but no more than 15%. 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. It’s effective for plan years beginning after Dec. 31, 2024.
“For startup plans, there are going to be some new provisions in there for automatic enrollment,” said Ream. “That was a relatively recent evolution in the retirement plan space. When you start, you’re automatically enrolled in the program. That is going to be an automatic 3% deferral and increasing 1% a year up to 10%. Essentially, it’s turning from an opt in to an opt out.”
In a benefit for sole proprietors of businesses, SECURE 2.0 allows retroactive first-year deferrals.
“There are going to be different deferral cutoff dates in year one,” said Ream.
Under the SECURE Act, an employer can establish a new 401(k) plan after the end of the taxable year, but before the employer’s tax filing date and treat the plan as having been established on the last day of the taxable year. Those plans can be funded by employer contributions up to the employer’s tax filing date. SECURE 2.0 allows these plans, when they are sponsored by sole proprietors or single-member LLCs, to receive employee contributions up to the date of the employee’s tax return filing date for the initial year, according to a summary by the Senate Finance Committee.
Student loan matching
Another provision helps employers offer incentives to younger employees who are still trying to pay off their student loans.
“For employers, there’s a provision for student loan matching,” said Ream. “We know the student loan debt burden has grown year after year. One of the main hurdles for a recent graduate starting to plan for retirement is typically, there are a lot more folks owing this debt burden of student loans hanging over their head. “If they’re qualified student loan payments, what employers will be able to offer is [the ability to say] go ahead and make your loan payment, and we’re going to match that payment and make a contribution for you.”
The provision aims to help employees who may not be able to save for retirement because they’re overwhelmed with student debt and are missing out on available matching contributions for retirement plans. It allows such employees to receive those matching contributions for repaying their student loans. It permits an employer to make matching contributions under a 401(k) plan, 403(b) plan or SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) with respect to “qualified student loan payments,” which is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee. Government employers are also allowed to make matching contributions in a 457(b) plan or another plan for such repayments. It’s effective for contributions made for plan years starting after Dec. 31, 2023.
Employers who offer such perks could have a better chance of attracting young employees and keeping them. “Everybody’s in this fight for talent,” said Ream. “If I’m an employer looking to attract and retain new and happy employees, that student loan match is going to have a lot of gravity, as far as a perceived benefit of employment.”
A related provision deals with 529 college savings plans. “There’s a provision in the bill that now will allow for a 529 plan to be converted to a Roth,” said Ream. “If the kids are finished with school, and there’s still a balance in that 529 plan, the provision is going to allow for a 529 to Roth IRA rollover. There are some guardrails around that. The 529 would have to have been in place for 15 years. This is intended for someone who didn’t use their full 529 balance, and all the kids are through school. After 15 years have elapsed, that 529 balance would be able to be distributed and moved directly into a Roth IRA. There is a lifetime limit of $35,000. The big question has always been what do I do if I have this excess balance? In the past, you changed the beneficiary of the 529 if you had no other children, a niece or a nephew. But now we at least have the option of letting the child roll that into a Roth IRA account. “That’s an enhancement and incentive for retirement savings.”
Roth 401(k) changes
Another new benefit in SECURE 2.0 involves Roth 401(k) accounts. “A lot of participants elect for a Roth 401(k),” said Ream. “We know that employee deferral into the Roth 401(k) is after-tax dollars in the Roth. Employer matches traditionally always went into the qualified side of the traditional 401(k). Those employer matches now will be able to be deemed Roth contributions and basically build the Roth account faster. .. If I’m deferring into my Roth 401(k), my employer match was going into the traditional 401(k). There can now be an election that I want to receive my match into my Roth to build my Roth 401(k) faster.”
Another provision involving Roth 401(k) plans involves required minimum distributions.
“Prior to SECURE 2.0, there was a required minimum distribution that was attached because it was a Roth 401(k), just like a traditional 401(k),” said Ream. “That required minimum distribution on Roth 401(k)s has now been removed. So like a traditional Roth IRA, you won’t be subject to that required distribution now at age 73.”
There are also some new provisions for a Roth SEP (simplified employee pension) that didn’t exist in the past and are new for 2023. “Employers can now treat SEP and SIMPLE IRA employer contributions and deferrals as a Roth,” said Ream. “Previously, that was only all pre-tax.”
Dollar limit increase for mandatory distributions
Under current law, employers can transfer their former employees’ retirement accounts from a workplace retirement plan into an IRA if their balances are between $1,000 and $5,000. SECURE 2.0 increases the limit from $5,000 to $7,000 for distributions made after Dec. 31, 2023.
“In the past, when an employee was terminated, typically if the balance was below the $1 amount, you could automatically flush them out from the participant pool,” said Ream. “That money would get rolled into an IRA, or if it was under $1,000, a check would simply be mailed to them. Those numbers have increased. Now, unless otherwise directed by the participant, SECURE 2.0 increases that from $5,000 to $7,000. That could be perceived as an advantage or disadvantage. But in essence now, anybody with a balance of $7,000 or greater can remain a participant. What it should do is lessen the amount of people that get a letter saying we severed employment on January 1, and it’s now March 31, so 90 days have passed, and we’re going to take your balance and roll it into an IRA on the 401(k) platform for whoever that 401(k) provider was.”
SECURE 2.0 also includes a requirement to provide paper statements in certain cases.
“There’s a paper plan benefit statement requirement, basically saying that you’ve got to get a hard copy statement once a year,” said Ream.
With respect to defined contribution plans, unless a participant elects otherwise, the plan is required to provide a paper benefit statement at least annually. The other three quarterly statements required under the Employee Retirement Security Act of 1974 are not subject to this rule and can be provided electronically. For defined benefit plans, unless a participant elects otherwise, the statement that must be provided once every three years under ERISA must be a paper statement. The annual paper statement is effective for plan years beginning after Dec. 31, 2025.
Lost and found department
The Senate Finance Committee summary noted that every year, thousands of people approach retirement but are unable to find and receive the benefits that they earned often because the company they worked for has either moved, changed its name or merged with a different company. Similarly, every year employers around the country are ready to pay benefits to retirees, but are unable to find the retirees because the former employees changed their names or addresses. SECURE 2.0 creates a national online searchable lost and found database for Americans’ retirement plans at the Department of Labor that will enable retirement savers, who might have lost track of their pension or 401(k) plan, to search for the contact information of their plan administrator. The database will be available within the next two years.
“They’ve actually created a retirement plan lost and found,” said Ream. “If I’ve bounced around a bit and made some job changes in my life and have some straggler plans out there I don’t really remember, the DOL is going to create a national database, so employers and companies will be able to basically register with a database. When somebody leaves, they’ll be able to put a flag in there for them.”
Tax season discussions
Accountants can mention some of these changes to their clients when they visit for their annual tax prep appointment, so clients find out more about ways to put more of their income in tax-deferred retirement accounts. Or they could discuss the provisions later in the year as accountants familiarize themselves with the many provisions through continuing professional education and as regulators hammer out the details in the regulations.
“Typically, going into Q4, you’re starting to do a lot of the year-end tax planning,” said Ream. “There’s probably going to have to be a little bit of training, and a lot of this legislation will get fine-tuned with opinions. But I believe that, as CPAs, as we’re preparing taxes, these are just more talking points. This is probably a wonderful opportunity to get to know your clients better and deepen the relationship, but at the same time, provide meaningful information.”
Not all the provisions take effect right away. “Some of these provisions are right out of the gate in January 2023,” said Ream. “Some of these are rolling out through 2025. Most of the incentives for participants and retirees were on the immediate side.”
In any case, the changes in SECURE 2.0 can provide fodder for discussions anytime with clients.
“For our profession, this is an opportunity to have a little bit deeper conversation, especially with a small business employer or owner,” said Ream. “If you have less than 50 employees, it’s potentially taking a deeper dive into what your options are, and how we maximize outcomes. Years ago, everybody went into a SIMPLE because it was relatively simple compared to the regulatory burden that a traditional 401(k) held. If some of those burdens and walls are coming down a little bit, there are higher contribution limits that would be an opportunity for that small business owner. It should be a fantastic catalyst to a little education, learn a little bit more about a client, deepen the relationship, and hopefully provide some potential value.”