Going into 2023, President Biden enacted a new law called the SECURE Act 2.0 that makes changes to retirement savings accounts and employee benefit plans. This law goes into effect January 1, 2023.
Required Minimum Distributions (RMD)
Prior to the enactment, plan participants needed to receive a required minimum distribution by April 1st following the year the participant reaches the age of 72. The new law changed the age from 72 to 73, which directly affects plan participates who reached the age of 73 after December 31, 2022. In 2033 the RMD age increases from 73 to 75. The SECURE Act 2.0 also reduced the penalty for failure to receive an RMD from 50% to 25%. With the new act, Roth accounts will be excluded from RMDs whereas previously Roth accounts in a 401(k) or 403(b) plan were subject to the RMD rules.
Small Business Plan Startup Costs Modification
In previous years, there was a 3-year small business startup credit of 50% of administrative costs with an annual cap of $5,000. The SECURE Act 2.0 increases the startup credit from 50% to 100% for all employers with up to 50 employees. This does not apply to a defined benefit plan where instead an additional credit is provided. This additional credit is a percentage of the amount contributed by the employer for the employee with a cap of $1,000 per employee. This additional credit is limited to employers with 50 or fewer employees and is phased out for employers with 51 to 100 employees. The percentage of the additional credit is 100% in the first and second years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year. Once the fifth year is reached, there is no credit for tax years thereafter.
New Treatment of Employer Matching or Nonelective Contributions as Roth
Before the enactment of the SECURE Act 2.0 a retirement plan could only provide company contributions as pre-tax contributions, but now both matching contributions and nonelective contributions can be provided on a Roth basis provided the participant is 100% vested.
Effect on Catch-up Contributions and Limits
The SECURE Act 2.0 now states that if a participant’s wages in the prior year paid by the employer sponsoring the plan is greater than $145,000 then the participant may only contribute the catch-up as a Roth contribution whereas previously anyone 50 or older could contribute a catch-up contribution of $7,500 to a 401(k) plan as pre-tax or Roth. Before the enactment of the SECURE Act 2.0 anyone age 50 or older could contribute a catch-up of $7,500 to a 401(k) plan, but with the new plan, the catch-up limit was increased to either the greater of $10,000 or 50% more than the regular age 50 catch-up amount in 2025.
Treatment of Student Loan Payments as 401(k) Contributions to Match Contributions
This 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 their employers’ matching contributions to retirement plans. With the new act, employers are now allowed to make matching contributions under a 401(k) or 403(b) plan for “qualified student loan payments”.
Long-Term Part-Time Employees
Previously, retirement plans were allowed to be excluded for part-time employees working less than 1,000 hours during a plan year, but now 401(k) plans will be required to cover long-term part-time employees. A long-term part-time employee is considered to be someone who works two consecutive 12 month periods with more than 500 hours of service each year. The employee must still meet the plan’s age requirement and contribute their own money to the 401(k) plan, and the company is not required to provide any company contributions. Be advised that service hours prior to January 1, 2023, are excluded when determining the two consecutive years of at least 500 hours.
The new act requires that participants be automatically enrolled in 401(k) and 403(b) plans upon becoming eligible. This allows for the employees to opt out of the coverage. The initial enrollment is at least 3% but no more than 10% and each year after the enrollment the amount is increased by 1% until it reaches 10% but not more than 15%. Current 401(k) and 403(b) plans are grandfathered and do not need to comply with this rule if the plan was set up prior to January 1, 2023. This also includes an exemption for small businesses with 10 or fewer employees and new businesses that have only been in business for less than 3 years.