Retirement Savings Plans,For Individuals,For Plan Sponsors,Custom

SECURE 2.0 Act of 2022 Included in 2023 Omnibus Appropriations Package

December 22, 2022

On December 20, Congress introduced the bipartisan, bicameral SECURE 2.0 Act of 2022 (SECURE 2.0) as part of a $1.7 trillion omnibus spending bill.

The retirement package includes approximately 100 provisions designed to boost participation in workplace retirement plans and reduce the cost and administrative burdens of sponsoring them.

Earlier this year, the House of Representatives passed the Securing a Strong Retirement Act of 2022. Senate committees also approved two slightly differing bills: The Enhancing American Retirement Now Act (EARN Act) and the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Act, (RISE & SHINE Act). These three bills are the basis for SECURE 2.0 and builds on the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted to improve retirement savings opportunities for workers.

MissionSquare Retirement is hosting a webinar on SECURE 2.0 and What It Means for Governmental Plans at 12:00pm on January 17, 2023 – details to follow.

Key provisions included that are effective upon enactment or January 1, 2023

  • Increase Required Mandatory Distribution Age
    • The original SECURE Act increased the age at which participants in employer-sponsored defined contribution plans and traditional (non-Roth) individual retirement accounts must begin taking required minimum distributions (RMDs) to 72, up from 70½.
    • SECURE 2.0 further increases the age for starting RMDs to age 73* beginning Jan.1, 2023. This will be stepped up to age 75 in year 2033. 
  • Reducing 50% Penalty Tax
    • Failures by an individual to take minimum distributions are subject to a 50% excise tax. The bill reduces that tax to 25%. If a failure to take a required minimum distribution is corrected in a timely manner (as defined under the bill), the excise tax on the failure is further reduced from 25% to 10%. Effective for taxable years beginning after the date of enactment.
  • Eliminate the 457(b) “First day of the month” rule
    • Participants in a 457(b) plan must request changes in their deferral rate prior to the beginning of the month in which the deferral will be made.  The bill allows, but does not require, such elections to be made at any time prior to the date that the compensation being deferred is available, thus conforming the 457(b) rule to the 401(k) and 403(b) rule. Effective for taxable years beginning after the date of enactment.
  • Public Safety Officers:
    • Present law provides an exclusion from gross income ($3,000) for a distribution from a governmental retirement plan to a public safety officer to pay for his or her health insurance premiums. The exclusion required that the plan directly pay the insurance company. This provision repeals the direct payment requirement. Effective for distributions after date of enactment.
    • The proposal also modifies the exception from the 10% early distribution tax for distributions made to a qualified public safety employee following separation from service after age 50 to also apply if the employee separates after at least 25 years of service under the plan. Thus, a distribution from a governmental plan that is made to a qualified public safety employee after separation from service after attainment of age 50 or 25 years of service under the plan (whichever is earlier) is exempt from the early withdrawal tax. Effective for distributions made after the date of enactment.
    • SECURE 2.0 modifies the definition of qualified public safety employee to also include any employee of a State or political subdivision who provides services as a corrections officer or as a forensic security employee providing for the care, custody, and control of forensic patients. Thus, a distribution from a governmental plan that is made to such a corrections officer or forensic security employee after separation from service after attainment of age 50 (or 25 years of service under the aforementioned proposal) is exempt from the 10% early withdrawal tax. Effective for distributions after the date of enactment.
  • Automatic disaster relief
    • In recent years, Congress has on a case-by-case basis, made available various forms of distribution and loan relief to retirement plan participants and IRA owners who have been affected by federally declared disasters.  The bill would automatically make disaster-related distribution and loan relief available upon the issuance of a federal disaster declaration. The bill’s distribution relief, including the waiver of the 10% early distribution penalty, would only be available for distributions of up to $22,000. The bill’s automatic relief would be available for distributions and loans made with respect to disasters the incident period for which begins on or after January 26, 2021.

Key provisions included that are effective January 1, 2024:

  • Requirement that Age-Based Catch-Up Contributions Must be Roth
    • SECURE 2.0 requires that, depending on wages, age-based catch-up contributions to employer-sponsored plans must be made to Roth accounts, allowing the government to tax these dollars sooner. Roth account contributions are made with post-tax dollars that can be withdrawn tax-free after retirement. Catch-up contributions currently can be made on either a pretax or Roth basis (if permitted by the plan sponsor). Effective January 1, 2024.
      • Under the bill, the Roth mandate only applies to employees whose wages (as defined for Social Security FICA tax purposes) were over $145,000 (indexed) in the prior year.
      • The bill also specifies that employees with wages below $145,000 would be permitted to make catch-up contributions on a pre-tax or after-tax Roth basis.
      • If any participant in a plan to which the Roth catch-up rule applies has wages over $145,000 in the prior year, then no participant may make catch-up contributions unless the plan allows Roth catch-up contributions. This rule generally ensures that plans that want to permit catch-up contributions must offer Roth catch-up contributions.
      • For this rule, a plan could simply offer pre-tax catch-up contributions, thus precluding those with wages over $145,000 in the prior year from making any catch-up contributions.
    • Authorize Student Loan Payment Matching
      • The legislation provides a statutory basis for employers to make matching contributions to retirement plans based on employees' student loan payments. The matching contributions for student loan payments must vest under the same schedule as other matching contributions. Effective January 1, 2024.
    • Addressing the Need for Emergency Savings
      • SECURE 2.0 includes two optional emergency savings provisions to give employers a choice of different approaches. Both are effective January 1, 2024.
      • The first would permit employers to offer workplace emergency savings accounts linked to defined contribution plans. Employers may automatically opt employees into these accounts at no more than 3% of their salary, and the accounts are capped at $2,500 (or lower as set by the employer). Contributions are made post-tax and are treated as elective deferrals for purposes of retirement matching contributions. Once the cap is reached, the excess emergency savings contributions return to retirement plan savings.   
      • The second provision provides an exception for certain distributions used for emergency expenses, which are unforeseeable or immediate financial needs relating to personal or family emergency expenses. Only one distribution would be permitted per calendar year of up to $1,000, and a taxpayer would have the option to repay the distribution within three years. If they choose not to repay the distribution within a certain time, they wouldn’t be allowed to take other emergency distributions for three-years.

Key provisions included that are effective January 1, 2025, and beyond:

  • Older workers could make larger Catch-Up Contributions
    • SECURE 2.0 increases the annual catch-up amount for participants ages 60 through 63. The bill increases these limits from $7,500 to the greater of (1) $10,000 or (2) 150% of the regular catch-up (which would be $11,250 in 2023.) for participants ages 60 through 63, starting Jan. 1, 2024. This higher limit would be indexed for inflation. Effective January 1, 2025.
  • Expedite Part-Time Workers' Participation
    • The original SECURE Act expanded eligibility for long-term, part-time workers to contribute to their employers' 401(k) plan. The bills would shorten from three years to two years the consecutive years of service for eligibility that starts in 2023 and expand this to apply to ERISA-covered 403(b) plans as well.
  • Saver’s Match Program
    • The Saver’s Match replaces the current nonrefundable Saver’s Credit for certain IRA and retirement plan contributions with a federal matching contribution that is deposited into an IRA or retirement plan.
    • The Match program would incentivize retirement savings by providing a 50% matching contribution on up to $2,000 in retirement savings annually for low- and middle-income Americans, without regard to whether an individual has a tax liability. Effective for taxable years beginning after 2026.
  • Mandatory Automatic Enrollment/Escalation
    • SECURE 2.0 requires employers that establish new 401(k) and 403(b) defined contribution plans to automatically enroll newly hired employees, when eligible, in the plan at a pretax contribution level of 3 percent of the employee's pay. This level would increase annually by 1 percentage point up to at least 10 percent but not more than 15 percent of the employee's pay. Employees could affirmatively elect a different contribution.
    • This provision would not apply for small businesses with 10 or fewer employees, those in business for less than three years, church plans and governmental plans. Effective January 1, 2025.

Next Steps

It is widely anticipated that the 2023 omnibus appropriations package that includes the SECURE 2.0 Act of 2022 will pass on or by December 23, 2022.  The package then heads to the President for signature and enactment into law.    The responsible Federal agencies will begin their rulemaking process to implement SECURE 2.0 in 2023. 

MissionSquare Retirement is hosting a webinar on SECURE 2.0 and What It Means for Governmental Plans at 12:00pm on January 17, 2023, to provide greater details and analysis of the package.  Webinar details to be shared shortly. 

Please contact your MissionSquare Retirement representative if you have questions.

* Age 70½ (if you were born before July 1, 1949), age 72 (if you were born after June 30, 1949, and before January 1, 1951), or age 73 (if you were born after December 31, 1950).

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