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On December 29, 2022, the Consolidated Appropriations Act of 2023 (HR 2617) was signed into law. The Act includes important provisions affecting retirement savings plans which are intended to build upon the 2019 SECURE Act. These provisions, collectively referred to as SECURE 2.0, offer many new benefits to employers and employees which are designed to make it more attractive for employers to offer retirement plans and to improve retirement outcomes for employees.

Below is a summary of selected provisions with potentially broad effect. However, the Act includes some 90 provisions affecting retirement savings plans. Taxpayers are advised to seek additional guidance from other professionals to assess what changes may be relevant to their circumstances.

Highlights of the SECURE Act 2.0

Key provisions for younger workers

  1. Automatic enrollment increased.

Beginning in 2025, the bill would expand automatic enrollment in retirement plans with the aim of prompting more people to save for retirement. With some exceptions for small businesses, the bill requires 401(k) and 403(b) plans to automatically enroll eligible participants, starting at a minimum 3 percent contribution and increasing annually to at least 10 percent but no more than 15 percent. Employees who do not wish to enroll will be required to opt out.

Plans established before the act’s enactment date are exempt from the automatic enrollment provision. So are SIMPLE 401(k) plans, Sec. 414(d) governmental plans, and Sec. 414(e) church plans. Any plan maintained by an employer that has been in existence for less than three years and any plan maintained by an employer with 10 or fewer employees is also exempt.

  1. Withdrawals allowed for emergency expenses.

 Beginning in 2024, qualified plan participants will be able to take a penalty‐free distribution of up to $1,000 once per year, which won’t be subject to the usual additional 10 percent tax that applies to early distributions. However, if you do not repay the distribution within a certain time frame, you will have to wait three years before being allowed to take another emergency distribution.

  1. Pension-linked emergency savings accounts

The act amends the Employee Retirement Income Security Act (ERISA) to allow plans to establish short-term savings accounts as part of an individual account plan on behalf of an eligible participant. Such accounts will be Roth accounts of up to $2,500 with no minimum contribution or account balance requirements that allow for withdrawal or distribution of the account balance, at least once a month, at the participant’s discretion. Such distributions will not be subject to the Sec. 72(t) 10% additional tax for early withdrawals.

  1. Matching contributions extended to those paying student loans

Beginning in 2024, employers will be permitted to make qualified retirement plan contributions to employees who are not contributing to the plan if that employee is making qualified student loan payments.

Key provisions for older workers

  1. Increase in beginning age for RMDs

The act increases the applicable age at which beneficiaries must begin taking required minimum distributions (RMDs) from qualified retirement plans and annuity contracts as follows:

  • For an individual who attains age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2033, the applicable age is 73.
  • For an individual who attains age 74 after Dec. 31, 2032, the applicable age is 75.

This increase applies to RMDs required to be made after Dec. 31, 2022, by taxpayers who reach age 72 after that date.

  1. Higher catch-up limit for older individuals

The act increases the current catch-up limit to the greater of $10,000 ($5,000 for SIMPLE plans) or 50% more than the regular catch-up amount in 2024 (2025 for SIMPLE plans) for individuals who attain ages 60, 61, 62, and 63, effective for tax years beginning after Dec. 31, 2024. The dollar amounts are indexed for inflation beginning in 2026.

The catch-up contribution amount for individual retirement accounts (IRAs) is currently set at $1,000 and does not adjust for inflation. Beginning in 2024, the legislation would index the IRA catch-up contribution for inflation in $100 increments.

  1. Expanded Roth rules.

Beginning in 2023, Roth contributions can be made to both SIMPLE IRA and SEP IRAs plans and employer matching contributions to a qualified retirement plan can be made to a Roth account. Defined contribution plans can provide participants the option of treating matching contributions as Roth contributions.

Beginning in 2024, required minimum distributions from designated Roth accounts will be eliminated and all catch‐up contributions to qualified retirement plans will be treated as Roth contributions. An exception is available for employees with compensation of $145,000 or less (indexed for inflation). The ability for taxpayers to decide whether they want to fund any or all their retirement accounts with pre-tax or Roth contributions is a definite positive.

  1. Tax-free rollovers from Sec. 529 accounts to Roth IRAs

The act permits beneficiaries of Sec. 529 college savings accounts to make direct trustee-to-trustee rollovers from a Sec. 529 account to a Roth IRA without tax or penalty. The Sec. 529 account must have been in existence for more than 15 years at the time of the rollover, and aggregate rollovers cannot exceed $35,000. Rollovers are also subject to the Roth IRA annual contribution limits. The change is effective for distributions made after Dec. 31, 2023.