On December 23, 2022, President Joe Biden signed the SECURE 2.0 Act of 2022. It has numerous provisions that affect qualified retirement plans.

SECURE Stands for:

S – Setting

E – Every 

C – Community

U – Up for

R – Retirement 

E – Enhancement 

The defense authorization and government budget measure that Congress approved at the end of December included SECURE 2.0.

The act aims to enhance the retirement goals of every individual. It will strengthen the retirement system of Americans.

SECURE 2.0 has a lot of provisions; the highlights include raising the retirement age at which beneficiaries must start withdrawing RMDs from IRA and 401(k) funds and modifying the size of catch-up contributions for older employees who participate in employee retirement plans.

Let’s see the major provisions of the act.

Required Minimum Distributions

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For those who turn 72 after December 31, 2022, the mandatory minimum distribution age, at which eligible retirement plan pay-outs must start, is raised to 73 beginning January 1, 2023. After 10 years, the required minimum distribution age will rise to 75 again but only for people who become 74 after December 31, 2032. 

Increase in Catch Up Distributions

In 2025, participants aged 60 to 63 will be able to contribute catch-up money up to $10,000 or 150% of the standard catch-up amount.

Mandatory Roth Treatment of Catch-Up Contributions for High Earners

From 2024, employees who earn more than $145,000 (adjusted for cost of living) from their employment are eligible to contribute catch-up amounts to the company’s plan, providing the plan permits them, but only as Roth contributions.

Cash-Out Limitation Increases

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The obligatory cash-out cap is raised to $7,000 for qualified retirement plan withdrawals made after 2023. The employers who want to implement the change must make quickly amend their plan and make appropriate changes to plan the procedures. 

Roth Contributions

The employers must set pre-defined contribution plans and allow the participants to match the employer’s contribution.

Automatic Enrolment and Automatic Escalation

For plan, years starting after December 31, 2024, SECURE 2.0 mandates that new 401(k) plans and 403(b) plans include an automatic enrolling capability.

The automatic enrolment rate must be at a minimum of 3% and a maximum of up to 10% of the compensation. Similarly, automatic enrollment participants must increase their deferral rate by 1 percent each year under these plans, up to a maximum of 15%. EACA also allows you to opt-out within 90 days. 

Emergency Distributions

The employers have the right to amend the defined contribution plans to allow the participants to receive emergency distributions of up to $1000 per year starting in 2024. 

The emergency includes some difficult situations. The point to remember is that there should be only one distribution in any three years, with the exception of any emergency distributions the employee rolled over in the two years before. The emergency distribution is taxable but not subject to a 10% excise tax. 

Terminal Illness Distributions

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From December 29, 2025, employers have to amend their retirement plans to enable members to withdraw their benefits without paying the 10% excise tax if they are qualified for distribution and have a terminal illness, according to a doctor’s certification. The amount can be repaid in some cases. 

Domestic Violence or Abuse Distributions

From 2024, employers may modify their retirement plans. It will allow the members who have certified that they have gone through domestic violence or abuse within the last year to take payment. The distribution will be less than 50% of their account balance or $10,000. 

As we said, emergency funds are prone to taxation but not subject to the 10% excise tax and can be paid later within three years of borrowing. 

Long-term Care Insurance Distributions

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From December 29, 2025, the employers may modify their retirement plans to allow the members can withdraw money in order to purchase long-term care insurance.

The dividend can only be less than the cost of the insurance, 10% of the vested account balance, or $2,500 each year, whichever is less (to be adjusted for cost-of-living). The 10% excise tax does not apply to these distributions if otherwise applicable.

Distributions on Account of FEMA-Declared Disasters 

For disasters on or after January 26, 2020, Distributions up to $22,000 will not be subject to a 10% excise tax if they are related to a recognized calamity. The disaster distributions can also be repaid within three years. 

De Minimis Incentives to Participate

The employers can now give employees with de minimis (small) financial incentives to participate in the employers’ 401(k) or 403(b) retirement plan. These Minimis incentives can’t be paid out of plan assets. 

403 (b) Plan Changes

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There are some specific changes to the 403 (b) plans. In one of the simple changes, the 403 (b) rules will be adjusted to align with those for 401 (k) plans. In another big and long-sought simplification, 403 (b) plans will now be allowed to participate in bank collective investment trusts. Both of these changes are already implemented since December 29, 2022. 

Expansion of Requirement for Part-Time Employee Participation

 The act requires employers to allow certain employees to begin participating in their employer’s 401 (k) plan. The following employees qualify for this:

• Old part-time employees have worked at least 500 hours or for a minimum of three years. 

In SECURE 2.0, the conditions are eased for employees, and now is as follows:

• The employees must have worked 500 hours a year. 

Matching Contributions Based on Participants’ Student Loan Repayments

In the past, some of the employees have not received matching contributions. The reason is that the funds to carry out the student loan payments, funds had to be transferred into a 401(k), 403(b), or federal 457(b) plan for the company to execute the student loan payments. 

From 2024, employer 401(k), 403(b), and the governmental 457(b) plans allow matching certain student loan payments such that they were plan contributions. For all reasons, including non-discrimination tests and safe harbor regulations, matching donations will be treated like ordinary matching contributions.

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Emergency Savings Accounts

Sponsors of defined contribution retirement plans may provide a linked emergency savings account. The members who are not compensated may contribute a maximum of $2500. The account must give freedom for withdrawal by the member at least once a year. The initial four distributions of the year from the account should not face any fees or charges. 

Expanding Scope of Self-Correction for Plan Errors

Section 305 of SECURE 2.0 requires the IRS to expand the Self-Correction Program (SCP) application. In simple terms, the members will be able to correct the errors themselves, including the loan errors. It also increases the period till the mistake can be corrected. 

Other Administrative Changes

There are many other provisions as well to the SECURE 2.0.

Some of the other administrative changes are as follows:

• Creating a database to search for lost participants that are hard to find. 
• Employers will have easy choices for how to notify employees who opt not to participate in retirement plans. 

Final Words

At last, we would say that employers must take the provisions seriously and implement them. It is also important to coordinate with the service providers. But one thing is sure SECURE 2.0 will provide more opportunities to save for retirement. 

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