Omnibus Bill Brings Expanded Changes for Retirement Savings

Just three years after SECURE Act of 2019 (SECURE Act) brought sweeping changes to retirement plan savings, Congress has changed the rules again.

The Consolidated Appropriations Act of 2023, signed by President Biden on December 29, 2022, includes  the changes as SECURE 2.0 Act of 2022 (SECURE 2.0). The SECURE 2.0 package contains 90 different provisions aimed at encouraging retirement savings, easing administrative requirements, modifying the administration of employer plans , and building on the foundation laid by the SECURE Act.  

Some of the more significant individual provisions include:

Changes to required minimum distributions:

• The current age for required minimum distributions (RMDs) is generally age 72. Prior to January 1, 2020, RMDs were required to begin at 70½. SECURE 2.0 increases the RMD age to 73 for individuals who attain age 72 after December 31, 2022 and age 73 before January 1, 2033. This means that for individuals who turned 72 in 2022, the first RMD must be taken by April 1, 2023. However, if an individual turns 72 in 2023, the due date for the first RMD will be April 1, 2025. The RMD age will further increase to 75 for individuals who attain age 74 after December 31, 2032.
• Under current law, Roth IRA owners are exempt from taking RMDs while they are living. Beginning in 2024, the RMD exemption will extend to Roth amounts held in employer retirement plans.
• IRAs currently permit a spousal beneficiary to treat the deceased owner’s IRA as their own for purposes of the RMD rules. Effective in 2024, this option will be extended to all qualified retirement plans.

Impacts to retirement plan catch-up contributions:

• Currently, retirement plan participants who are age 50 and over are permitted to make catch-up contributions subject to the applicable limits. Effective in 2025, for employees ages 60-63, the limit on catch-up contributions to qualified retirement plans (401(k), 403(b), and governmental 457(b) plans) will be increased from $7,500 to the greater of i) $10,000 or ii) 150% of the regular catch-up amount for 2024. For SIMPLE plans, the limit will be increased to the greater of $5,000 or 150%. Both amounts will be indexed for inflation after 2025.
• Effective in 2024, it will be mandatory that catch-up contributions to qualified retirement plans be treated as Roth contributions for certain high-wage participants. Eligible plan participants whose Social Security wages exceed $145,000 (indexed for inflation) for the preceding calendar year from the employer sponsoring the plan will be taxed on their catch-up contributions (but will avoid taxes on subsequent earnings under the Roth requirement).
• For IRA catch-up contributions, the $1,000 limit currently in place for individuals 50 and over will be indexed for inflation beginning in 2024.

Expansion of Roth contributions:

• Beginning in 2023, SIMPLE IRAs will be allowed to accept Roth contributions. Additionally, Simplified Employee Pension Plans (SEPs) would have the option of treating employee and employer contributions as Roth (in whole or in part).
• Currently, only elective contributions by employees to employer-sponsored plans are eligible to be made on a Roth basis. SECURE 2.0 will permit participants of qualified retirement plans to designate employer matching or nonelective contributions as Roth contributions. Student loan matching contributions may also be designated as Roth contributions. While the provision is effective for contributions made after the date of enactment, it will take time for plan providers to offer the option and for payroll systems to be updated.

Qualified charitable distributions:

• The legislation will expand the IRA charitable distribution provisions beginning in 2023 to allow individuals to make a one-time distribution, up to $50,000 (indexed for inflation) for qualified charitable distributions (QCD) to certain split-interest entities, including charitable remainder trusts or a charity gift annuity.
• Also beginning in 2023, the annual IRA qualified charitable distribution limit of $100,000 will be indexed for inflation.

Reduction or waiver of excise tax penalties:

• Under existing law, if an individual fails to take an RMD in the amount required, they are subject to an excise tax penalty equal to 50% of the RMD shortfall. Beginning in 2023, the excise tax penalty will be reduced from 50% to 25%. Further, if timely corrective action is taken, the penalty will be further reduced to 10%.
• Current law imposes a 10% penalty for withdrawals from tax-preferred retirement accounts before normal retirement age. Some of the 10% penalty exceptions provided for in SECURE 2.0 include:
  • A terminally ill employee, as defined (effective immediately).
  • Domestic abuse survivors (beginning in 2024). Up to the lesser of $10,000 or 50 percent of the participant’s account can be withdrawn, with the opportunity to repay the withdrawn money to the plan over three years and have the income tax paid refunded.
• Corrective distributions and corresponding earnings related to excess contributions to an IRA are exempt from the early withdrawal tax. To qualify, the corrective distribution must be made by the due date (including extensions) of the tax return for the year in which the excess contributions are made.

Provisions to enhance early retirement savings:

• Beginning in 2024, 529 plans that have been open for at least 15 years that are not needed for educational purposes can be rolled into a Roth IRA account for the beneficiary in a trustee-to-trustee transfer, subject to annual Roth contribution limits and a $35,000 aggregate lifetime limit. Each rollover will be treated as a contribution towards the annual Roth IRA limit and rollovers cannot exceed the aggregate before the five-year period ending on the date of distribution.
  
  This provision will provide assurance to parents and grandparents who have funded 529 plans that, in the event the 529 beneficiary receives scholarships, attends a less expensive school, or does not attend college, the money can still be of benefit.
• Beginning in 2024, employees will be allowed to receive employer matching contributions to a 401(k) plan, 403(b) plan, governmental plans, or a SIMPLE IRA by reason of repaying their student loans.
• The Saver’s Credit currently provides an income tax incentive in the form of a nonrefundable tax credit to encourage lower income taxpayers, such as young adults, to save for retirement. Effective in 2027, the existing Saver’s Credit will be changed from a tax credit paid through an income tax refund to a federal matching contribution deposited into the taxpayer’s IRA or retirement plan.

Next steps with Secure 2.0 and your retirement plan

The impact of SECURE 2.0 on retirement plans is wide-reaching. For employers and plan administrators, the good news is that most of the provisions have delayed implementation dates. It will be important that you consult with your retirement plan administrator or your trusted tax advisor on any of the specific employer plan provisions, or to better understand any of the individual retirement provisions.