Big Changes on the Retirement Plans Front
The update to the SECURE [Retirement] Act, which is known as SECURE 2.0, makes a number of significant changes to the original SECURE (“Setting Every Community Up for REtirement”) Act. Some are mandatory, some are discretionary; some are to be effective immediately, and some not for several years.
Those changes that are to be effective immediately are the following:
Increase in minimum age for taking RMDs from 70½ to 72
Reduction of excise tax penalty for late RMD distribution from 50% to 25%
Matching contributions and non-elective contributions that are fully vested when contributed can now be put into Roth IRAs
Elimination of penalty for early distribution (before age 59½ to a terminally ill person with a maximum life expectancy of 84 months (7 years)
Distribution for federally declared disaster of up to $22,000 per disaster – still taxable, but tax may be spread over 3 years. Distribution may be repaid over following 3 years. Total such distributions may total either $100,000 or total vested plan balance, whichever is less.
Repayment window of distribution for birth or adoption tightened to 3 years (previously open-ended); distributions taken before December 29, 2022 must be repaid before January 1, 2026.
Hardship withdrawals may be self-certified if 3 conditions are met:
1) they have an immediate and heavy financial need,
2) the amount of the hardship withdrawal requested is not in excess of what is needed to meet the need, and
3) the employee cannot otherwise reasonably meet the financial need with other resources
Employers may offer de minimis incentives for employees to join retirement plans; those must be paid for by the employer, not the plan.
Rules for recovery of overpayments are relaxed somewhat, and certain restrictions are applied to such recovery efforts.
Plan sponsors who detect an inadvertent error may self-correct such errors, whether “significant or insignificant,” as long as the correction is completed within a “reasonable period” after discovery or at least some action was taken toward correction before the error is detected by the IRS. The IRS has been directed by Treasury to update procedure directions by 12/29/2024.
Changes to be effective in 2024:
Catch-up contributions made by plan participants whose annual in the prior plan year was over $145,000 (to be indexed going forward) must make contributions as Roth (after-tax) contributions, regardless of whether the plan is a 401(k), 403(b) or 457(b) [gov’t] plan.
For distributions starting on 1/1/24 and going forward, the automatic cash-out limit is increased to $7,000 from the current $5,000 level.
Starting January 1, 2024 and going forward, Roth accounts will no longer be subject to pre-death RMD distribution requirements.
Options to be Available in 2024:
Plans may set up their own “emergency savings program” for non-highly-compensated participants. The contributions must use after tax money, and each account is limited to $2500 (to be indexed in future years). There are limits on how this money can be invested in order to preserve the principal. Participants must be allowed to withdraw at least once per month, at their own discretion. If an employer matches regular plan contributions, they must also match contributions to the emergency fund.
Plans may provide for matching contributions based on payments made by participants on qualified student loans. A qualified student loan must generally be taken to pay higher education expenses.
“Certain plans” (not specified) may allow a distribution with no early distribution penalty (normally 10%) to a participant who is the victim of domestic abuse. The distribution is limited to either $10,000 (indexed in future years) or 50% of the individual’s bested account balance; it must be taken within one year of the domestic abuse, which must have been committed by either a spouse or a domestic partner. The participant has the option of repaying the distribution, but that must be done within 3 years.
Plans may also allow participants to take a distribution of up to $1,000 (certain limitations apply) once per year for a personal emergency. That emergency must be an unforeseeable emergency, or an immediate personal or family-related financial need. The plan may accept the participant’s self-certification of need, and the participant may have 3 years to repay the funds. Failure to repay (either via contributions or separate payments) will render the participant ineligible to take another emergency distribution for the next 3 years.
Changes to be Enacted in 2025:
Long-term part-time employees will be eligible to participate if they meet these conditions:
They are at least age 21, and
They have completed at least 500 hours in each of 2 consecutive 12-month period.
Their participation may begin after the second of the two above periods. This provision applies to 401(k) and 403(b) plans covered by ERISA.
The annual “catch-up” limit for individuals who are at least age 60 but younger than age 64 will be the greater of $10,000 or 150 of the regular catch-up limit for those under 60 (indexed in future years).
The DOL is instructed to create an online database for individual to search for possible lost or overlooked retirement benefits. The information for this database will be part of regular reporting by plan administrators.
Change to be Effected after 2025:
Defined contribution plans (401(k) and 403(b) plans) will be required to provide one paper benefit statement annually for plan years beginning on January 1, 2026. Exceptions may apply.
Option to be Available after 2025:
Plans will have the option to allow participants to take distributions to purchase long-term care insurance contracts. The amount of the distribution will be limited to the lowest of the following amounts: 1) the amount of the premium the participant owes for the year for the long-term care insurance, 2) 10% of the participant’s vested plan account balance, or 3) $2,500 (indexed in future years). This provision is effective for distributions beginning on or after December 29, 2025.