New Options Allowed for Retirement Plans

According to the Federal Reserve, only 40% of non-retirees feel that their retirement savings are on track.  In response to this, the SECURE 2.0 Act was signed into law in December of 2022.  The Act includes numerous enhancements to encourage employees to prepare for a stronger financial future. 

Here’s a bird’s eye view of some of the changes this Act makes that may impact your employee’s preparation for retirement:
 

Starting in 2023: 

• Owners of retirement accounts will now have an extra year (increased to age 73 from age 72) before being required to start taking Required Minimum Distributions (RMDs).   
• The penalty for failing to take an RMD has been decreased from 50% of the RMD amount not taken to 25%. 
• A plan sponsor may permit employees to designate employer matching contributions or non-elective contributions as Roth contributions (previously not allowed), so it can grow tax-free.  Such contributions must be 100% vested when made.    

Starting in 2024: 

• Some ROTH accounts in an employer-sponsored retirement plan will no longer have an RMD requirement.
• Employers will be able to add an emergency savings account to their defined contribution retirement accounts for their non-highly compensated employees.  Employees will be able to contribute up to $2,500 a year (post-tax, ROTH basis) to this account with their first 4 withdrawals a year being free of charges or fees.  Distributions are exempt from the 10% early distribution penalty tax.   
• Employers will be able to match employee’s “qualified student loan payments” into a retirement account. 

Starting in 2025: 

• 60-to-63-year old’s will be able to make catch-up contributions to their employer-sponsored retirement accounts of up to an additional $10,000 per year or 150% of the standard catch-up contribution limit.  Moving forward, this limit will be indexed to inflation.
• Employers will be required to automatically enroll eligible employees in their 401(k) or 403(b) plans starting at a contribution rate of at least 3% and no more than 10%. The plan must also provide for automatic escalation of 1% to be applied to an automatically enrolled participant’s deferral rate each year up to a total deferral rate of at least 10% but no more than 15%.  Employees who wish not to participate will need to proactively opt out of the plan within the 90 days of the first deferral.  This will apply to all plans not in existence on the date of enactment of Secure 2.0. 

Starting 2027: 

• Employees deemed to be “low to middle-income” will be eligible for a federal matching contribution of up to $2,000 annually that must be deposited into their retirement savings account.  Employees eligibility will phase out based on income and tax-filing status. 

Starting in 2033: 

• Owners of retirement accounts will be given an additional 2 years (increased to age 75 from age 73) to start taking Required Minimum Distributions (RMDs).

Please keep in mind that some of the provisions are required but a number are optional.  Plan administrators are still awaiting guidance or regulations on proper implementation as many of the provisions would require system changes.  As always, LandrumHR will be keeping abreast of the guidance as it is released. 

LandrumHR does not give tax or financial advice.  Please encourage your employees to consult with their personal financial and/or tax advisor prior to making decisions for their financial future.