The SECURE ACT 2.0 Is Here. What does it mean for your retirement plan?

The SECURE Act 2.0 was recently passed by Congress as part of the Consolidated Appropriations Act of 2023 right before the New Year. This law is probably the most significant piece of legislation since the Pension Protection Act of 2006. There are so many new provisions, it’s simply impossible to cover them all (mostly because you’ll probably stop reading this article out of sheer boredom). Here are some of my favorite provisions that I believe will make a HUGE DIFFERENCE in how retirement benefits are delivered to employees across the country and how we can help employees improve their personal financial security:

1.     Option to provide employer matching for employees making student loan payments

For years we’ve been discussing the PLR that Abbott Labs obtained from the IRS to allow employees to receive matching contributions based on the amount of income they used to repay the cost of their student loans. Student loan debt is a problem in the US and many employees cannot afford to pay down their debt and save for their future. For plan years beginning after December 31, 2023, employers may elect to offer the option to provide employer-matching contributions to these employees based on the cost of their student loan payments as a percentage of their income. The match would use the same rules as your existing matching formula. For example, if you match 50% of an employee’s salary deferrals up to 6% of their eligible pay and an employee instead pays 6% or more of their income to pay their student loan debt, their employer could elect to fund a match of 3% of pay into the 401(k) or 403(b) plan on their behalf. Plus, there are rules to prevent this from causing a negative impact on the ADP test by allowing these employees to be disaggregated from testing!

2.     Emergency savings accounts

According to BankRate.com, roughly 56% of Americans are unable to cover a $1,000 unforeseen emergency expense. And all too often, employees use the loan feature in their retirement plan to pay for such expenses, which creates a troubling trend of using the 401(k) or 403(b) for something it wasn’t meant for. The SECURE Act 2.0 now enables employers to offer two different design options to create an emergency savings program for employees. My personal favorite is the Plan-linked Emergency Savings Account (PLESA) program, which enables employees to save up to $2,500 for Non-highly Compensated Employees and essentially treats them as removable Roth contributions. You can auto-enroll employees into these accounts at 3% of pay, provide employer matching on these dollars, and when the $2,500 limit is hit, you simply switch them to normal Roth contributions instead. Employees can take up to four withdrawals per year tax-free without fees.

3.     Saver’s match for lower-income workers

Congress is replacing the old Saver’s Tax Credit in 2027 with the new, government-funded Saver’s Match, which provides an additional matching contribution of up to $1,000 for lower-income workers to their IRA or employer retirement plan. The new match is in addition to any match the employee may receive from their employer. To be eligible for the Saver’s Match, individuals must meet the Adjusted Gross Income limits as prescribed by the government, which are indexed to inflation.

4.     Increased catch-up contributions for near-retirees

Beginning in tax year 2025, individuals aged 60-63 may make additional catch-up contributions above the current level at that time. The contribution will be the greater of $10,000 (indexed) or 150% of the catch-up limit. For example, the current limit for 2023 is $7,500. If the law were effective today, someone aged 60-63 could contribute $11,250 (150% x $7,500 equals $11,250, which is greater than $10,000).

 For me, the big “miss” by Congress is excluding people aged 64 and older. I guess it’s OK if Congress chooses to ignore the Age Discrimination in Employment Act.

5.     Participant disclosure improvements

For plan years that begin after December 31, 2022, employers will no longer need to provide ongoing retirement plan disclosures to participants who are not enrolled in the plan. To comply with the rules, the affected employees must receive the Summary Plan Description, an initial notice of plan eligibility, and an annual notification of their ongoing right to participate which also explains the benefits of the plan. This will simplify plan administration significantly.

However, the big miss by Congress is caving to lobbyists who insist that the participants receive one paper statement per year (only once every three years for DB plans) unless they opt-out. This provision essentially upended the 2020 e-delivery safe harbor rules. The good news is that this provision is not in effect until January 1, 2026. So, make sure you reach out to your employees and collect as many paper statement opt-outs as you can.

6.     Financial incentives to promote plan participation

This is one of my favorite new plan provisions as it can be an effective tool in increasing employee engagement and enrollment into the plan. Employers may now offer employees a small, immediate financial incentive for electing to contribute to a 403(b) or 401(k) without violating ERISA or the Tax Code. For example, let’s say you decide to offer a small gift card for each person signing up, but you will increase the value of the gift card based on the overall success rate of the enrollment period.  That could also leverage the power of co-worker persuasion as they each encourage others to participate to get the higher award as a team.

7.     Increased cash-out limit and auto-portability

Beginning in 2024, plan sponsors will now be able to force out small account balances with a value of less than $7,000. The previous limit was $5,000. Furthermore, balances that are forced out to an IRA can be automatically rolled over into a new employer’s plan unless the participant opts out.

8.     Retirement benefit “Lost and Found”

The problem of lost or forgotten retirement benefits has been a long-standing problem and the annual filing of Form 8955-SSA has not adequately ameliorated the problem. In the next two years, the Department of Labor (DoL) will be charged with establishing an online searchable database called the Retirement Savings Lost and Found, which will allow individuals to search for any possible lost retirement assets to which they may be entitled.

9.     Withdrawals for domestic abuse survivors

I’ve always found it surprising that hardship withdrawals were not available for people who are victims of domestic abuse. Retirement assets are often the only money employees have and making these dollars available to help someone in such dire circumstances seems natural. Now, survivors of domestic abuse will be able to withdraw up to the lesser of 50% of their account balance or $10,000 without the early withdrawal penalty. The money may also be repaid to the plan over three years at the election of the participant which would result in a refund of any taxes paid.

10. Option to treat employer matching and nonelective contributions as Roth after-tax dollars

Employers will now be allowed to offer their employees the option to accept employer matching contributions and nonelective (i.e., profit sharing) contributions as Roth after-tax contributions instead of the traditional pretax form. This provision is completely optional and would require a plan amendment, as well as some operational and administrative changes to implement. So, while it is effective immediately, it will likely be some time before we begin to see it implemented effectively by plan sponsors and recordkeepers.

11. Special disaster-related withdrawals rules for the use of retirement assets

Up until now, every time a national disaster is declared, Congress must pass special relief for the people who live in the affected areas to be eligible for withdrawals from employer-sponsored retirement plans and IRA accounts. Under the SECURE Act 2.0, the rules have now been standardized to allow for withdrawals of up to $22,000 without penalties. Also, such withdrawals can be accounted for as part of your gross income over the following three years with the option to pay it back over that same three-year period.

12. Distributions to pay for the premiums of long-term care insurance

The costs of long-term care insurance are considerable and yet they represent an important part of the cost of retirement. Going forward, these annual premiums can be paid from your retirement plan up to a total of $2,500 per year. I feel this makes sense since long-term care insurance is an investment in your future retirement, regardless of the age at which it may start. Roughly 72% of all employees retire prior to age 65 due to various circumstances, making the availability of long-term care insurance critical to help pay for certain portions of your healthcare.

13. Making automatic enrollment a required plan feature for new start-up retirement plans

Starting in 2025, all brand-new plans of companies with more than 10 employees and in existence for more than three years will be required to offer automatic enrollment with an initial default contribution of 3% and automatically increasing employees 1% per year to at least 10% of pay (but not to exceed 15%). While employees may individually opt-out of these features, they will be required in the design of new plans. This rule is effective with the enactment date of the law, which means if you establish a new plan in 2024 and don’t meet one of the exemptions listed above, starting in 2025, you will be required to add the automatic enrollment and automatic contribution increase features to your plan beginning in 2025. With time, this will have an incredible impact on the retirement preparedness of every worker in America.

14. QLACs and life annuities in retirement plans and IRAs

According to a study by AON, approximately 80% of employees surveyed want a lifetime income option made available to them in their retirement plan to protect their investments. However, many retirees are also quite wary of annuities because the money used to purchase them is no longer available for shorter-term liquidity needs and the benefit value of the contract can be lost if the retiree doesn’t live as long as projected.

Under the new SECURE ACT 2.0., Congress has removed some of the barriers to lifetime income by first altering the actuarial test rules for Required Minimum Distributions which makes certain annuity features available inside a plan or IRA. It also allows the account owner to elect to aggregate distributions from both the annuity and non-annuity portions of their account for purposes of determining minimum distributions, potentially reducing the annual RMD amount.

Finally, the new law repeals some of the rules on Qualified Longevity Annuity Contracts (QLACs) by eliminating the requirement that no more than 25% of the account balance can be invested in a QLAC and allowing up to $200,000 be used from the plan value to purchase a QLAC.

There are so many more provisions to this new law, but these are my personal favorites. Please feel free to share your comments and questions on these, or other provisions of the law, by reaching out to me here on LinkedIn, or setting up a meeting with me through my QR Code. #SHRM #HR #investing #401k

Advisory services are offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a Registered Investment Adviser. PCIA: 6201 College Blvd., Suite 150, Overland Park, KS 66211. PCIA doing business as Qualified Plan Advisors (“QPA”). PCIA and The Society for Human Resource Management ("SHRM") are not affiliated.