Changes to 401(k)s & Other Employer-Sponsored Plans
The 2023 omnibus spending bill, formally called the 2023 Consolidated Appropriations Act, included a significant number of changes for employer-sponsored retirement plans. These changes are referred to in the CAA as “Secure 2.0”, here are the highlights.
Changes to Required Minimum Distribution (RMD) Age
The year in which retirees are required to take RMDs has been increased from 72 to 73. It will increase again to age 75 in 2033.
Increase in Catchup Contribution Limits
Beginning in 2025, employees between the ages of 60-63 will be able to contribute an additional $10,000 in catchup contributions. This applies for non-SIMPLE plans, employees with a SIMPLE IRA will be able to contribute an additional $5,000.
Roth Employer Matching
Effective immediately, employers will be able to match Roth contributions with post-tax money. Previously employers could only match with pre-tax money even when the employee was contributing post-tax. There’s a catch: currently the match is taxable to the employee, meaning they will get taxed on money cannot access. This could create a cashflow issue because the tax will need to be paid out of the employee’s normal paycheck.
New 401(k) & 403(b) Plans Must Include Auto-Enrollment & Auto-Escalations
Beginning in 2025, most new 401(k) & 403(b) plans will have to have an auto-enroll feature that sets a default contribution on behalf of the employer between 3-10% of their salary. The plans must also have an auto-escalation feature, which increases the annual employee contribution by 1% per year up to at least 10%.
Creation of a New Lost Retirement Money Database
The Department of Labor has been asked to form an online, searchable database to help people recover their lost retirement funds. The funds may become lost when changing jobs, custodial firms getting acquired, or lost passwords or credentials. The database is expected to be operational in early 2025.
Emergency Withdrawals
Beginning in 2024, a participant can withdrawal up to $1,000 per year from their retirement account for certain emergencies. The withdrawal will be taxable and may be repaid within three years, but it will not be subject to the 10% penalty for early withdrawals. The employee must pay back the withdrawal before they are able to take another one.
Introduction of Pension-Linked Savings Accounts
Beginning in 2024, employers can create an Emergency Savings Account (EAS) as part of a defined contribution plan (AKA a 401(k) or similar). Employers can enroll non-highly compensated employees in an EAS up to 3% of their compensation, but maximum contributions cannot exceed $2,500. This will be indexed for inflation on an ongoing basis. All contributions must be made on an after-tax basis. Each month, participants may take withdraws from their EAS and the first four withdrawals for a year cannot be subject to distribution fees.
Updates to Eligibility Requirements for Part-Time, Long-Term Employees
Secure 2.0 modifies the measuring period for long-term, part-time employees from three years to two years. Currently, employees who work at least 500 hours per year for at least three consecutive years with the employer and satisfies the minimum age requirement (21) must be permitted to make 401(k) plan contributions. This also now applies to 403(b) plans that are subject to ERISA.
Complete Tax Credit for Starting Small Retirement Plans
Starting in 2023, employers with 50 or fewer employees, can qualify for a start-up tax credit of 100%, which was previously 50%.
“Gift Cards” for Contributing to a Plan
Effective in 2023, participants in a 401(k) pr 403(b) plan may receive de minimis financial incentives, not paid with plan assets, for contributing to the plan. This is a very fancy way of saying employers can provide small bonuses (like gift cards) to employees who contribute to their retirement accounts.