The much-anticipated legislation commonly referred to as the Retirement Secure Act 2.0 was passed on December 23rd, 2022. While there are many details to the 400-page document, here are some of the highlights of changes affecting 401k plans. The changes are extensive; some are required, some are optional, and some are complex. Many required changes are not effective until January 1, 2024, or later, which will enable plan sponsors and recordkeepers to prepare for implementation.
Here is a list of some of the changes that may have the biggest impact on 401k plan sponsors and participants.
Retirement Secure Act 2.0 Contributions
- Employer Matching contributions can be made as Roth (after-tax) contributions.
- Beginning in 2024, employers have the option to match student loan payments with a contribution to the employee’s retirement plan account. The goal is to help workers who are burdened by student loans and can’t afford to contribute to their retirement plan by ensuring that they are accumulating some retirement savings even as they pay down their loans.
- Employers will also have the option to allow employees to create “rainy-day funds” in their retirement plan. Individuals would then be able to withdraw up to $1,000 from the plan penalty-free for emergencies.
- Long-term part-time workers will become eligible for their company’s retirement plan after two consecutive years with at least 500 hours of service. Previous law requires three years of service.
- In 2025 Catch up contribution limits will be raised to the greater of $10,000 or 150% of the regular catch-up contributions for 2024 for people ages 60-63. For workers earning more than $145,000 beginning in 2024, all catch-up contributions must be treated as a Roth contribution.
Retirement Secure Act 2.0 Distributions
Required Minimum Distribution changes:
- The age at which participants must begin taking Required Minimum Distributions will change as of January 1, 2023, from 72 to 73. In other words, anyone who turns 72 in 2023 is not required to take a required minimum distribution for 2023; instead, they will be required to start taking RMDs for the calendar year 2024, the year they turn 73.
- Required Minimum Distributions will no longer be required for ROTH 401k’s starting in 2024.
- Penalties are being eliminated for some hardship distributions, including victims of domestic abuse, people living in areas of federally declared disasters, and those who are terminally ill.
Other Significant Provision Changes:
- An Increase in automatic IRA rollovers from $5,000 to $7,000. Employers will now be allowed to force out terminated participants with balances under $7,000. The cash-out limit will remain the same at $1,000.
- Elimination of Notice Requirements for Unenrolled Participants (Effective for Plan Years Beginning After December 31, 2022)
There are numerous notices that are required to be sent to plan participants. Under current law, these notices must be sent to employees who are eligible to participate in a 401(k) plan, even if they have elected not to participate. SECURE Act 2.0 allows defined contribution plan sponsors to avoid sending multiple notices to unenrolled participants. Instead, the plan sponsor will be required to send unenrolled participants the summary plan description and an annual notice regarding their eligibility to unenroll and any application election deadlines.
What Plan Sponsors Should Do Now
- Begin as soon as possible to assess the impact of the changes required by Secure Act 2.0 on your retirement plan.
- Determine which optional provisions of Secure Act 2.0 you desire to incorporate into your plans and address operational compliance for all applicable provisions.
- Once the above assessments and determinations are completed, begin to consult with your Plan Administrator on the timing of plan amendments.
- Consider the timing and content of employee communications and updates to the summary plan descriptions.
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Raymond James (R.J.) Reibel
Financial Advisor, Retirement Benefits, Director
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Sources: Charles Schwab “RIA Washington Watch special edition” January 13, 2023; Epstein Becker Green “Secure Act 2.0: What 401(k) Plan Sponsors Need to Know” January 19, 2023; Fidelity Investments “The Secure 2.0 Act of 2022 Passes” January 3, 2023.
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