What You Need to Know About SECURE 2.0

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By Amit


Ron Ulrich, Vice President, Product Consulting & Compliance, ADP Retirement Services

Retirement planning is a key factor that every employee will need to consider. Whether you just entered the workforce or are soon to retire, it’s important to be aware of new legislation that has effect on retirement savings plans.

The SECURE 2.0 Act of 2022 was signed into law on December 29, 2022. The SECURE 2.0 Act includes multiple provisions that touch retirement savings plans in a way intended to build upon the original 2019 SECURE Act. The new provisions provide multiple benefits to both employers and employees all driven around the goal of getting more employers to offer retirement plans to their employees and more employees to take advantage of retirement savings programs. This will facilitate adoption of retirement plans by employers and improved retirement outcomes for workers.

SECURE 2.0 includes over 90 provisions. Employers will need to understand the new rules and options and discuss what changes may be relevant with legal counsel and retirement plan professionals. Below are a few provisions from SECURE 2.0 that all employers and employees should know:

Automatic Enrollment and Escalation

Beginning in 2025, for new retirement plans started after December 29, 2022, employees must be automatically enrolled unless they opt out of enrollment. Contributions must start between 6% and 10% of eligible wages and contribution percentages must automatically increase by one percent on the first day of each plan year following completion of a year of service until the contribution is at least 10 percent, but no more than 15 percent. Exceptions apply for governmental and church plans, businesses with 10 or fewer employees, and employers that have been in business for less than three years.

Optional Roth Treatment of Employer Contributions

Effective immediately, employers may amend their plans to permit employees to elect that employer matching and non-elective contributions be made as Roth (after-tax) contributions, as long as they are 100 percent vested when contributed to the plan. Additional guidance is expected on this feature.

Expanded Eligibility for Long-Term, Part-Time Employees

Currently, employees who work between 500 and 999 hours for three consecutive years must be allowed to participate in their company’s retirement plan. SECURE 2.0 reduces the time period to two years, effective in 2025. This does not apply to employees who participate in collectively bargained plans, or to nonresident aliens.

Treatment of Student Loan Payments for Matching Contributions

Beginning in 2024, student loan payments can be treated as retirement contributions for the purpose of qualifying for matching contributions in a workplace retirement account. Employers will be able to make contributions to their company retirement plan on behalf of employees who are paying student loans instead of saving for retirement. Employers may rely on the employee to certify annually as to the amount of their qualifying student loan payments. This provision should be a welcome addition to a benefit program for employers looking to attract and retain employees. It allows employees to benefit from matching contributions that they otherwise might miss out on.

Emergency Savings Accounts Linked to Retirement Plans

Beginning in 2024, retirement plans may offer linked “emergency savings accounts” that permit non-highly compensated employees to make Roth (after-tax) contributions to a savings account within the retirement plan. Balances in an emergency savings account must be eligible for distribution at least once per month. Withdrawal transactions are penalty-free and do not need to be substantiated, e.g., to show a qualifying emergency cause.

Employers may automatically opt employees into these accounts at no more than three percent of eligible wages. Employees can opt-out of participation. No further contributions can be made if the savings account has reached $2,500 (indexed), or a lesser limit established by the employer. Once the cap is reached, additional contributions can be directed to the employee’s Roth defined contribution plan (if they have one) or stopped until the balance falls below the limit. No employer contributions are permitted.

Employee contributions to an emergency savings account must be eligible for the same matching contributions that apply for elective deferrals. Matching contributions are made to the retirement plan – not to the emergency savings account. Upon termination of employment, any emergency savings account can be converted to another Roth account within the plan or can be distributed to the participant.

This provision addresses a common objection to participation in retirement savings. One such example, for instance, is if an employee fears that they may need any retirement contributions for unforeseen emergencies. The Treasury Department may issue guidance on these provisions.

Withdrawals for Certain Emergency Expenses

Generally, an additional 10 percent tax applies to early distributions from tax-preferred retirement accounts, such as 401(k) plans. In addition to the emergency savings account option described above, beginning in 2024, SECURE 2.0 provides an exception for certain distributions for emergency expenses, which are generally unforeseen immediate financial needs relating to personal or family emergency expenses. Only one distribution is permissible per year of up to $1,000, and a taxpayer has the option to repay the distribution within three years. No further emergency distributions may be made during the three-year repayment period until any amounts previously taken are repaid. The employer may rely on an employee’s written certification that the employee is facing a qualifying emergency personal expense, absent actual knowledge to the contrary. Further guidance is expected on this provision.

Saver’s Match

Beginning in 2027, lower-income employees will be eligible to receive a federal matching contribution of up to $1,000 per year that would be deposited into their retirement savings account. The matching contribution is 50 percent of the employee’s contributions that do not exceed $2,000 but is phased out as income increases (for example, between $41,000 and $71,000 for married, filing jointly; $20,500 to $35,500 for single taxpayers; etc.). This match replaces the current Saver’s Credit.

Required Minimum Distributions (RMDs)

The requirement to begin taking RMDs will increase from age 72 to age 73 in 2023, and then to age 75 in 2033. In addition, the penalty for not taking a RMD is reduced from 50 percent of the amount required to be withdrawn currently to 25 percent, and to 10 percent if corrected within two years.

Immediate Incentives for Participation

Currently, employers can only provide matching contributions as an incentive to participate in a retirement savings plan. Effective for plan years beginning after 2022, employers may offer modest financial incentives, such as gift cards, which may help increase participation. However, any financial incentives should be of de minimis amounts and cannot be paid with plan assets.

Expanded Credit for Retirement Plan Administrative Costs

Currently, employers with less than 100 employees may be eligible for a three-year start-up tax credit of up to 50 percent of administrative costs, with an annual limit of $5,000. SECURE 2.0 increases this credit to 100 percent of qualified start-up costs for employers with up to 50 employees.

In addition, a new credit of up to $1,000 per employee for eligible employer contributions may apply to employers with up to 100 employees but the credit phases out for employers with 51 to 100 employees.

Retirement Savings “Lost and Found”

SECURE 2.0 establishes an online searchable database, within two years of enactment, that will allow a participant or beneficiary to search for contact information for plan administrators of plans in which the participant or beneficiary may have a benefit. Beginning in 2025, plans will be required to share information with the Department of Labor to be included in the database.

To learn more about SECURE 2.0 and its provisions, visit here. For the latest on how federal and state tax law changes may impact your business, visit the ADP Eye on Washington page located at https://www.adp.com/spark/legislation.aspx.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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