The recently enacted “version 2.0” of the Secure Act complements and enhances aspects of the original Secure Act passed in 2019. Like its predecessor, the law contains many complex provisions designed to expand the number of Americans who participate in workplace retirement plans and increase the level of contributions to those plans made by both employees and employers—thereby enhancing retirement security. The article details the most significant of those provisions so that CPAs can help individuals and businesses navigate the effects of this legislation in the coming years.
On December 29, 2022, President Biden signed into law the Consolidated Appropriations Act, 2023, an omnibus spending bill funding the federal government for the 2023 fiscal year. Included in the bill’s more than 1,600 pages was the Securing a Strong Retirement Act of 2022 (Secure 2.0), which in many ways complements and enhances aspects of the original Secure Act passed in 2019. Like its predecessor, the Secure Act 2.0 includes a vast array of provisions designed to make it easier for small businesses to offer retirement plans for their employees, to increase access to workplace retirement plans for more workers, and to strengthen incentives for retirement savings. The act’s 92 provisions are organized into six relevant parts, as follows by title: Expanding Coverage and Increasing Retirement Savings, Preservation of Income, Simplification and Clarification of Retirement Plan Rules, Technical Amendments, Administrative Provisions, and Revenue Provisions. This article highlights some of the most significant provisions in the act.
Title I—Expanding Coverage and Increasing Retirement Savings
As evidenced by this title, two primary goals of the Secure Act 2.0 are expanding retirement plan coverage and increasing the retirement savings of individuals. With those objectives in mind, section 101 of the act requires IRC section 401(k) and 403(b) plans to automatically enroll participants in these plans once they become eligible, although employees have the right to opt out of coverage. Furthermore, this section allows an employer to set the employee’s contribution percentage at a minimum of 3% but not more than 10% of the employee’s compensation. Each year thereafter, the employee’s contribution percentage is to be increased by 1% until it reaches at least 10%, but not more than 15%. Employees may specifically elect “not to have such contributions made or to have such contributions made at a different percentage.” All current 401(k) and 403(b) plans are grandfathered by the act; there are exceptions for small businesses with 10 or fewer employees, new businesses in existence for less than three years, church plans, and governmental plans. Section 101 is effective for plan years beginning after December 31, 2024.
Under existing law, small employers (those with fewer than 100 employees) that establish a new retirement plan are entitled to a credit for plan startup costs. That credit is equal to 50% of plan administrative costs for the first three years after a new plan is implemented up to an annual cap of $5,000. Section 102 increases the startup credit to 100% of plan administrative costs for employers with up to 50 employees. This section also creates a new credit for small employers that initiate new retirement plans. The additional credit is available to employers with up to 50 employees; the amount of the credit generally will be a percentage of employer contributions on behalf of employees, up to a per-employee cap of $1,000. This new credit phases out for employers with 51 to 100 employees. In determining the amount of the contribution credit, any employer contributions on behalf of employees with compensation exceeding $100,000 in a taxable year are ineligible. The applicable percentages for the new credit are 100% (first and second years), 75% (third), 50% (fourth), 25% (fifth), and no credit thereafter. Section 102 is effective for tax years beginning after December 31, 2022.
Congress had previously enacted the Saver’s Credit, which was designed to help lower- and middle-income Americans who contribute to a qualified retirement plan [(i.e., a 401(k), a traditional IRA, or a Roth IRA] by providing them with a refundable tax credit. The Secure Act 2.0 section 103 repeals and replaces the Saver’s Credit with a Saver’s Match with respect to IRA and retirement plan contributions. Although the Saver’s Credit was paid in cash to taxpayers as part of a tax refund, the Saver’s Match will be a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan; the match is 50% of IRA or retirement plan contributions, up to $2,000 per individual. In addition, the matching contribution will not count toward the employee’s annual contribution limit; if in any year an employee’s annual contributions to a retirement plan total less than $100, the matching contribution will be applied against the employee’s tax liability instead of being deposited into the employee’s retirement account. The new Saver’s Match is income based; it phases out as taxpayers reach certain modified adjusted gross income (MAGI) levels based on their filing status. Individuals under the age of 18, dependents, full-time students, and nonresident aliens will not be eligible. Section 103 is effective for taxable years beginning after December 31, 2026; until then, the Saver’s Credit will remain in effect.
Multiple employer retirement plans provide an opportunity for two or more small unrelated employers to band together to share the administrative costs associated with offering retirement plans. The Secure Act of 2019 made such multiple employer plans (MEP) more attractive by eliminating outdated barriers to the use of MEPs and improving the quality of MEP service providers. Section 106 of the Secure Act 2.0 allows 403(b) plans—typically sponsored by charities, educational institutions, and other nonprofit entities—to participate in MEPs. This is especially beneficial to employers offering 403(b) plans, because it includes relief from the so-called “one bad apple” rule. Under this rule, all employers in an MEP could face adverse consequences from the bad acts of another employer in the group. Section 106 is effective for plan years beginning after December 31, 2022.
Individuals are generally required to take minimum mandatory distributions from retirement plans to help ensure that retirement funds are withdrawn (and taxed) during an individual’s lifetime, as opposed to being used as an estate planning tactic to shield them from taxation. The original Secure Act increased the age at which required minimum distributions (RMD) must begin from 70½ to 72. In recognition of Americans’ increasing life expectancy, section 107 of the Secure Act 2.0 further raises the age at which RMDs must be taken to 73 in 2023 and to 75 beginning in 2033.
Section 101 of the act requires IRC section 401(k) and 403(b) plans to automatically enroll participants in these plans once they become eligible, although employees have the right to opt out of coverage.
Current legislation allows individuals who have reached age 50 to make additional pre-tax contributions to an IRA. The additional allowable amount is $1,000, but it was not indexed for inflation when enacted, thereby eroding the intended benefit over time. Section 108 provides that the $1,000 amount be indexed for inflation and is effective for taxable years beginning after December 31, 2023.
In a similar vein, section 109 allows for higher catch-up limits to qualified retirement plans for individuals between ages 60 and 63 (inclusive). Under current law, individuals who have reached the age of 50 are allowed to make catch-up contributions into a retirement plan in excess of the otherwise allowable limits. Section 109 increases these limits to the greater of $10,000 or 50% more than the regular catch-up amount in 2025 for individuals ages 60–63; the increased amounts are also indexed for inflation after 2025. Section 109 is effective for taxable years beginning after December 31, 2024.
The popular press is replete with stories about how student loan debt is preventing lower- and middle-income taxpayers from being able to save for retirement purposes. Section 110 of the Secure Act 2.0 attempts to address this issue by allowing employers to treat student loan payments by employees as elective deferrals for purposes of matching contributions. In essence, employees may receive matching contributions to their 401(k), 403(b), or Simple IRA plans by making payments on their student loan debt. A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses. Governmental employers are also allowed to make matching contributions in an IRC section 457(b) plan or another plan with respect to such repayments. Section 110 is effective for contributions made for plan year beginning after December 31, 2023.
Under prior law, the small-employer pension plan startup tax credit was not available to employers that joined a MEP that had been in existence for at least three years because the startup tax credit only applied to the first three years that a plan was in existence. Section 111 amends prior law by allowing employers to take the tax credit for three years after joining a MEP, regardless of how long the MEP has been in existence. Section 111 is effective retroactively for taxable years beginning after December 31, 2019.
Employers are allowed, even encouraged, to provide matching contributions as a means of providing long-term incentives for employees to participate in employer-provided retirement plans. Under previous law, however, employers were prevented from providing employees with immediate financial incentives (e.g., small-denomination gift cards) for participating in workplace retirement plans. Section 113 of the Secure Act 2.0 now allows employers to provide de minimis financial incentives (e.g., gift cards) to employees to induce participation in workplace retirement plans. These financial incentives, however, may not be paid for with plan assets and the financial incentives are exempted from IRC sections 401(k)(4)(A) and 403(b)(12)(A). Section 113 is effective for plan years beginning after December 29, 2022.
Unless otherwise allowed by law, an additional 10% tax applies to early distributions from tax-advantaged retirement plans, such as 401(k) plans and IRAs. Section 115 provides an exception from the 10% tax for certain distributions used for “meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.” Only one distribution of up to $1,000 is permissible per year, and a taxpayer has the option to repay the distribution within three years. No further emergency distributions are allowed during the three-year period unless repayment occurs. Section 115 is effective for distributions made after December 31, 2023.
Under prior law, employers with Simple plans were required to make contributions to match employees’ elective deferrals of up to 3% of compensation or make a flat 2% nonelective contribution to the accounts of all qualified employees. Section 116 of the Secure Act 2.0 relaxes those limitations by allowing an employer to make additional contributions to each employee of the plan, if the additional contributions are made in a uniform manner and provided the contributions do not exceed the lesser of up to 10% of compensation or $5,000 (indexed for inflation). Section 116 is effective for taxable years beginning after December 31, 2023.
Under prior law governing Simple IRA plans, the annual contribution limit for employee elective deferrals is $14,000 (in 2022) and the catch-up contribution limit beginning at age 50 is $3,000. For employers with no more than 25 employees, section 117 of the Secure Act 2.0 increases the annual deferral limit to 110% of the 2024 Simple IRA plan limit (as indexed) and increases the catch-up contribution limit at age 50 to 110% of the 2024 Simple IRA plan limit (as indexed). Employers with 26–100 employees are allowed to provide these higher deferral limits, provided that the employer either makes a 4% matching contribution or a 3% employer non-elective contribution. This section of the Act also makes similar changes to the contribution limits for Simple 401(k) plans. Section 117 is effective for taxable years beginning after December 31, 2023.
The Secure Act 2.0 allows for the creation of a starter 401(k) or a safe harbor 403(b) plan for employers with no retirement plan. Under this arrangement created by section 121 of the act, all employees are required to be enrolled (although employees may opt out) at an elective deferral rate of between 3% and 15% of compensation. Employee deferrals are limited to the IRA contribution limit ($6,500 in 2023). Employees who have reached age 50 may contribute an additional $1,000 as a catch-up provision. Section 121 is effective for plan years beginning after December 31, 2023.
In recognition of the trend toward part-time employment, the original Secure Act requires that employers allow long-term, part-time workers to participate in their 401(k) plans under certain conditions. The 2019 Act required that—except in cases of collective bargaining arrangements—employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee must complete either one year of service in which the employee works at least 1,000 hours or three consecutive years of service in which the employee works at least 500 hours. Section 125 of the Secure Act 2.0 amends the original act by reducing the three-year rule to two years, effective for plan years beginning after December 31, 2024; as a result, more part-time workers will qualify to participate in 401(k) plans. But section 125 also provides that pre-2021 service is disregarded for vesting purposes, just as such service is disregarded for eligibility purposes under current law, effective as if included in the original Secure Act to which this amendment relates. Section 125 also extends the long-term part-time coverage rules to 403(b) plans that are subject to the Employee Retirement Income Security Act of 1974 (ERISA).
Acknowledging the fact that many Americans do not have even $1,000 in savings in the event of a financial emergency, section 127 of the Secure Act 2.0 creates an option for employers to offer non-highly compensated employees pension-linked emergency savings accounts. Employers that decide to offer this benefit may automatically opt employees into these accounts at no more than 3% of compensation, but employee contributions are capped at $2,500 (or lower, if set by the employer). Contributions to these emergency savings accounts are made on an after-tax basis and any investment gains are tax free (similar to Roth accounts). In the event the $2,500 cap is reached, any additional employee contributions can be directed to the employee’s Roth defined contribution plan (if it exists) or suspended until the employee’s account balance falls below the cap. Upon separation from service, employees may take their emergency savings accounts as cash or roll the balance into any Roth defined contribution plan or IRA. Section 127 is effective for plan years beginning after December 31, 2023.
Title II—Preservation of Income
An actuarial test in the RMD regulations has historically prevented individuals from using a life annuity in connection with defined contribution plans and IRAs. In addition, the actuarial test prohibited issuers of life annuities from including certain desirable provisions within their annuity contracts, such as annuity payments that increase modestly over time and period-certain guarantees. As a result, many individuals have been reluctant to use life annuities in connection with their defined contribution or IRA arrangements. Section 201 of the Secure Act 2.0 eliminates many of those barriers, allowing life annuities to include provisions such as period-certain guarantees, return-of-premium death benefits, and guaranteed annual increases in annuity payouts as long as the increases are less than 5% annually. These changes make it likely that more individuals will use life annuities as part of their retirement planning strategies. Section 201 became effective January 1, 2023.
Qualifying longevity annuity contracts (QLACs) are deferred annuities that begin making payments at the end of an individual’s life expectancy. This type of annuity is designed to prevent retirees from outliving their retirement savings. But RMD rules have been an impediment to the growth of QLACs because they generally require that payments begin at age 72 (under prior law), which is normally earlier than most individuals’ life expectancy. Also, under prior law, the maximum premium for a QLAC could not exceed the lesser of 25% of the account balance or $145,000 (as inflation-adjusted in 2022). Section 202 eliminates the percentage limitation and allows participants of defined contribution plans and owners of IRAs to use up to $200,000 (indexed for inflation) of their account balance to purchase a QLAC. This section also allows the purchase of QLACs with spousal survival benefits. Section 202 was effective as of December 29, 2022, but is subject to further IRS guidance to be issued within 18 months.
Title III—Simplification and Clarification of Retirement Plan Rules
Under prior law, taxpayers who did not take RMDs from retirement plans when required to do so were subject to a 50% excise tax on the amount of the shortfall. Section 302 of the Secure Act 2.0 reduces the penalty to 25%. In addition, if the failure to take the RMD from an IRA is corrected in a timely manner (as defined in the act), the excise tax is reduced to only 10%. Section 302 is effective for taxable years beginning after December 29, 2022.
Employers are allowed, even encouraged, to provide matching contributions as a means of providing long-term incentives for employees to participate in employer-provided retirement plans.
Section 305 relates to the expansion of Employee Plans Compliance Resolution System (EPCRS). The EPCRS is an IRS program that employers use to correct certain mistakes made in administering retirement plans to avoid the consequences of a plan disqualification. This section enhances the applicability of EPCRS by allowing more types of errors to be self-corrected and by expanding the program’s scope to include certain inadvertent failures and errors made in connection with IRAs. Although section 305 became effective upon enactment, the act directs the IRS to “revise Revenue Procedure 2021-30 (or any successor guidance) to take into account the provisions of the section not later than the date which is 2 years after the date of enactment of this Act.”
Section 307 allows the owner of an IRA to use available funds to make a one-time distribution of up to $50,000 to charity through a charitable remainder annuity trust, a charitable remainder unitrust, or a charitable gift annuity. There is also a provision in this section that indexes the $100,000 charitable distribution limit for inflation, effective January 1, 2023.
Section 314 allows a surviving victim of domestic abuse to withdraw funds from a qualified retirement plan or IRA—but not defined benefit plans or money purchase plans—without being subject to the 10% tax on early distributions. The amount of such distributions must be the lesser of $10,000 or 50% of the participant’s account balance and must be taken within one year of self-certifying that the abuse occurred. Abuse of the plan participant, the participant’s child, or another family member living in the household qualifies under this section. In addition, the participant has the opportunity to repay any amounts withdrawn over a three-year period and will be entitled to a refund of any income taxes paid on distributions. Section 314 is effective for distributions made after December 31, 2023.
The Secure Act 2.0 also includes a provision that excludes distributions made to a terminally ill individual from the 10% tax on early distributions from tax-preferred retirement accounts. Section 326 requires that any individual requesting such distributions be certified by a physician as having a terminal illness. It became effective on December 29, 2022.
Section 331 establishes permanent rules for qualified distributions from retirement plans related to federally declared disasters. Historically, federally declared disasters have been followed by the federal government issuing specific guidance relating to special distributions from retirement plans on a disaster-by-disaster basis. This section creates permanent rules for qualified distributions from retirement plans resulting from federally declared disasters. Specifically, Section 331 permits distributions of up to $22,000 from retirement plans and IRAs for individuals whose “principal place of abode” is in a qualified disaster area and exempts such distributions from the 10% tax on early withdrawals. This provision also allows participants to repay any qualified distributions over a three-year period. Finally, when a federal disaster recovery distribution is taken, unless the taxpayer elects otherwise, for income tax purposes the amount of the distribution will be taken into gross income ratably over a three-year period. Section 331 is effective for disasters occurring on or after January 26, 2021.
The U.S. Department of Health and Human Services estimates that approximately 70% of Americans over age 65 will require some form of long-term care (LTC) during their lifetimes. This includes care in a nursing home, an assisted living facility, or the individual’s home. In recognition of this need, section 334 of the act allows retirement plans to distribute up to $2,500 per year (indexed for inflation) for the purchase of certain LTC insurance policies for the participant or the participant’s spouse. Such distributions will not be subject to the 10% tax on early distributions. Not all LTC policies will qualify; only LTC contracts that provide “meaningful financial assistance in the event the insured needs home-based or nursing home care [qualify]. For purposes of the preceding sentence, coverage shall not be deemed to provide meaningful financial assistance unless benefits are adjusted for inflation and consumer protections are provided, including protection in the event the coverage is terminated.” Section 334 becomes effective on December 29, 2025.
Title IV—Technical Amendments and Title V—Administrative Provisions
Title IV includes three technical and five clerical amendments to the original Secure Act of 2019. These amendments are effective as if originally included in the prior legislation.
Title V includes provisions relating to plan amendments. These allow plan amendments implementing provisions of the act to be made on or before the last day of the first plan year beginning on or after January 1, 2025, provided the plan is operating in accordance with such plan amendments as of the respective effective dates.
Title VI—Revenue Provisions
Under prior law, neither Simple IRAs nor simplified employer pension (SEP) plans could accept Roth contributions and SEPs could only accept employer contributions. Section 601 of the Secure Act 2.0 allows Simple IRAs to accept Roth contributions and allows employers to offer employees the option to treat employee and employer SEP contributions as Roth contributions (in whole or in part). Section 601 is effective for taxable years beginning after December 31, 2022.
Similarly, section 604 allows employers to provide employees with the option of receiving employer matching or nonelective contributions as Roth contributions. Previously, employer matching and nonelective contributions to 401(k), 403(b), and governmental 457(b) plans had to made be on a pre-tax basis only; now, plan sponsors may provide participants with the option of receiving matching and nonelective contributions as Roth contributions. Section 604 became effective on December 29, 2022.
The Secure Act 2.0 is a substantial piece of legislation with wide-ranging implications for employers and employees alike. It builds on the enhancements included in the original Secure Act of 2019 by enacting myriad new provisions designed to expand the number of Americans covered by employer-sponsored retirement plans and by providing incentives for individuals to contribute more to those plans. CPAs and other financial advisors should familiarize themselves with the provisions of the law so that they can better advise clients.
Due to the expansive nature of the legislation and the multitude of ways in which it will impact small businesses, this article highlights only a portion of the act’s provisions. Among the more prominent elements of the Secure 2.0 Act are the following:
- A provision that increases the tax credit for small employer pension plan startup costs from 50% to 100% for the first three years and creates a new tax credit of up to $1,000 per employee for employer contributions to new plans;
- Mandatory automatic enrollment of employees in 401(k) and 403(b) plans once they become eligible;
- An increase in the age at which RMDs are to begin, to 73 in 2023 and 75 in 2033;
- A provision that allows student loan payments by employees to be treated as elective deferrals for purposes of employer matching contributions;
- Creation of the Saver’s Match, which involves a federal matching contribution into a taxpayer’s IRA or retirement plan account;
- Waiver of the 10% tax on early distributions for emergency personal expenses, employees with a terminal illness, in cases of domestic abuse, and instances in which an employee is impacted by a qualified federally declared disaster;
- Creation of a Starter 401(k) or a safe harbor 403(b) for employers with no retirement plans;
- More generous rules to allow a greater number of part-time workers to participate in employer-provided retirement plans;
- A provision that allows employers to offer pension-linked emergency savings accounts to their employees; and
- Provisions that allow employees and employers to make larger contributions to Simple plans.
Many of the act’s provisions became effective upon enactment, whereas others will take effect over the next five years. Even with some of the provisions being effective as of the enactment date, from a practical standpoint, retirement plan sponsors will not necessarily be able to implement every element immediately. It may be years before many of the act’s provisions are fully integrated into employer-provided retirement plans. Nevertheless, the Secure Act 2.0 contains extensive and complex provisions designed to expand the number of Americans who participate in workplace retirement plans and substantially increase the level of contributions to those plans made by both employees and employers—thereby enhancing the retirement security of those individuals. Small businesses and their CPAs will be navigating the effects of this legislation for years to come.