What Should Plan Sponsors Know About SECURE Act 2.0?
By Jake Preston
Improving retirement readiness seems to be the one thing Congress can agree on! SECURE Act 2.0 was signed into law by President Biden on December 29, 2022 as part of a larger spending package passed by Congress. If you remember, the original SECURE Act passed in 2019 and included some significant changes for retirement investors.
At over 350 pages, SECURE Act 2.0 is a lot to digest! Below are what we believe to be the most significant provisions in SECURE Act 2.0 impacting qualified plans and plan sponsors.
Enrollment and Deferral Incentives Allowed
Effective beginning 2023, employers and plan providers will be able to entice employees to participate in plans by offering “de minimis financial incentives.” Something like “Sign up or increase your 401(k)-deferral percentage today and your next Starbucks coffee is on us!” The industry has tried everything else to get participants to contribute, so why not give freebies a shot!
Mandatory Plan Auto-Enrollment
Beginning in 2025, many new 401(k) and 403(b) plans will be required to include auto-enrollment. The list of exempt employers is long, however, and includes all existing qualified plans, employers less than 3 years old, church plans, governmental plans, SIMPLE plans, and employers with fewer than 10 employees.
Employers Can Now Make Roth Matching Contributions
Effective upon passage of the law, SECURE Act 2.0 allows employers to deposit matching and/or nonelective contributions to employees’ designated Roth accounts (e.g., Roth accounts in 401(k) and 403(b) plans). It is important to note that those amounts would be included in the employee’s income in the year of contribution.
Matching Provisions for Student Loan Payments
This provision was one that made a lot of headlines. Effective beginning in 2024, employers will be able to amend their plans to allow employer matching contributions for amounts paid by participants toward their student debt. Vesting and matching schedules must be the same as if the loan payments had been salary deferrals. This could function as a popular benefit to attract and retain young professionals with outstanding student loan debt.
Qualified Retirement Plan Catch-Up Contributions to be Indexed for Inflation
Beginning in 2025, catch-up contributions for plans such as 401(k) and 403(b) will be increased for those who are age 60, 61, 62, or 63. The contribution limit will be increased to the grater of $10,000 (indexed for inflation) or 150% of the “regular” catch-up contribution amount for plans in 2024. The catch-up contribution is currently $7,500 for 2023.
Similarly, SIMPLE Plan participants who are age 60, 61, 62, or 63 will have their plan catch-up contribution limit increased to the greater of $5,000 (indexed for inflation) or 150% of the ‘regular’ SIMPLE catch-up contribution amount for 2025.
RMDs No Longer Required from Roth Accounts in Employer Retirement Plans
Beginning in 2024, SECURE Act 2.0 eliminates RMDs for Roth accounts in qualified employer plans. Under previous law, while RMDs were not required from Roth IRAs, employer plan Roth accounts, such as Roth 401(k)s, Roth 403(b)s, governmental Roth 457(s), and the Roth component of the TSP were subject to the “regular” RMD rules.
Good news: for participants who have already started taking RMDs from an employer plan Roth account, the language of SECURE Act 2.0 indicates that participants can simply stop taking those distributions in 2024.
Creation of SIMPLE Roth IRAs and SEP Roth IRAs
SECURE Act 2.0 allows for the creation of both SIMPLE Roth IRAs and SEP Roth IRAs, effective January 1, 2023. Contributions to a SIMPLE Roth IRA or SEP Roth IRA would be included in the participant’s income. While participants in SIMPLE IRA and SEP IRA plans have possessed the ability to convert pre-tax amounts to Roth IRAs in the past, this provision allows for greater efficiency and eliminates the need for those conversions.
While this provision is already effective, it will take time for custodians, employers, and the IRS are able to implement the procedures and policies needed to establish these types of accounts.
These changes, and the many other changes not related to qualified plans, are certainly a lot to understand and highlight the importance of working with a fiduciary plan advisor. If you would like to speak with a Beacon Wealth Consultants advisor about your employer sponsored retirement plan and how these changes might affect you, contact us at info@beaconwealth.com or (540) 345-3891 or schedule a call.
Jake Preston, CFP® CKA® is a Christian financial planner in Roanoke, VA specializing in comprehensive financial planning and faith-based investing. In addition to serving clients, Jake is the Director of Advisory Services at Beacon Wealth Consultants where he oversees all aspects of financial planning for the company.