New law provides enhanced tools for retirement

The much-anticipated SECURE Act 2.0 became law late last month, giving all Americans new and enhanced retirement savings tools.

SECURE 2.0 was included in the $1.7 trillion omnibus spending bill and is follow-up legislation to the original SECURE Act (Setting Every Community Up for Retirement Enhancement Act) designed to increase employee access to tax-advantaged retirement plans. Significantly, SECURE 2.0:

Requires Automatic Enrollment in New Plans. For plan years beginning this year, SECURE 2.0 requires employers with new 401(k) or 403(b) plans to automatically enroll all eligible employees at a deferral rate of 3% to 10% of the employee’s annual compensation. That deferral rate automatically increases by 1% each year until it reaches an amount set by the employer of at least 10% (but not more than 15%) unless the employee makes a different deferral election. This provision does not apply to governmental or church plans or to new or small businesses.

Delays Required Minimum Distributions. Because people are delaying retirement, SECURE 2.0 increases the age for required minimum distributions (RMDs) to age 73. For decades, individuals were generally required to begin taking RMDs from their retirement accounts (including IRAs) by April 1 of the year following the later part of the year they reached age 70½ or terminated employment. The original SECURE Act changed that to age 72, and SECURE 2.0 changes the requirement to age 73, effective this year. The threshold moves to age 75 beginning in 2033.

Increases to Catch-Up Contributions. Under current law, employees may make additional “catch-up contributions” to their qualified retirement plan accounts starting in the year they reach age 50. That amount will be $7,500 in 2023. To further assist older workers who may not have saved enough for retirement, SECURE 2.0 allows workers ages 60 to 63 to have larger catch-up contributions of $10,000 or one and a half times the regular catch-up amounts — whichever is greater. After 2025, this will be indexed for inflation.

Enables Small Emergency Distributions. Starting in 2024, employees can take an emergency distribution once per year from their qualified retirement account balance for unforeseeable or immediate financial needs up to $1,000. Such distributions would be subject to ordinary income taxes but would not be subject to 10% early distribution penalties that normally apply for employees under age 59½. SECURE 2.0 also conforms hardship distribution rules for 403(b) and 401(k) plans.

Allows for Student Loan Payment Match Contributions. Effective in 2024, SECURE 2.0 will allow employers to make matching contributions to an employee’s retirement account based on student loan payments the employee makes. Because more workers have large student loan debts, some employees are forced to delay making meaningful 401(k) deferrals and consequently miss out on employer matching contributions. This provision is intended to enable employees to start building retirement savings even when they are paying off student loans.

As with the original SECURE Act and other legislation affecting qualified retirement plans, additional guidance will be forthcoming. Plan sponsors should consult with their legal counsel and advisors to determine how these and other aspects of SECURE 2.0 will affect them.

Kristi Hill works in the ERISA practice group at Fennemore. Ryan Curtis is chair of Fennemore’s ERISA and employee benefits practice group.