On December 29, 2022, President Biden signed the $1.7 trillion omnibus 2023 Consolidated Appropriations Act (CAA). Part of the CAA was the Secure 2.0 Act of 2022 (Secure Act 2.0). The Secure Act 2.0 has dozens of provisions that impact retirement plans, including 401(k) plans, 403(b) plans and IRAs. These provisions are phased in starting with the new year of 2023 through 2028, but the majority of the provisions become effective in 2023, 2024 and 2025. Some of the provisions are required and others are optional.
Key takeaways include:
The age to start taking mandatory required minimum distributions increases from 72 to 73 in 2023 and 75 in 2033.
The excise tax penalty for failing to timely take a required minimum distribution (RMDs) will decrease from 50% to 25% of the RMD and 10% if the distribution correction is timely made for IRAs.
Starting in 2024, RMDs will not be no longer be required from Roth accounts in employer retirement plans.
Current law allows retirement plans to transfer terminated participant’s balances of $1,000 to $5,000 to an IRA in the participant’s name. Service providers for retirement plans will be allowed to provide employer plans with automatic portability services which include the automatic transfer of that IRA into the participant’s new employer’s retirement plan. This starts in 2024.
In 2025, catch-up contributions will increase for those 60 to 63 to $10,000. After 2025, catch-up contributions for 401(k), 403(b), government plans and IRA will be indexed to inflation based on federally determined cost-of-living increases.
New 401(k) and 403(b) plans will require an automatic 3% enrollment provision starting in 2025.
401(k) plans will need to include an eligibility provision for part-time employees were employees with at least 500 hours of service for three years. Beginning in 2025, the three years of 500 hours is reduced to two years.
Other provisions include:
Employers of domestic employees are permitted to provide retirement benefits under a Simplified Employee Pension (SEP) (2023).
Defined contribution retirement plans will be able to add an emergency savings account that is a designated Roth account eligible to accept participant contributions for non-highly compensated employees starting in 2024. Contributions would be limited to $2,500 annually and the first four withdrawals would be tax and penalty-free (2024).
After 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000 (2024).
Starting in 2024, employers will be able to match employee student loan payments with matching payments to a retirement account (2024).
Be aware that there are a number of other provisions including those regarding hardship and domestic abuse distributions, retroactive first year elective deferrals for sole proprietors, and optional treatment of employer matching or nonelective contributions as Roth contributions. Many of the other provisions impact employer sponsored retirement plans only or relate to specific types of retirement plans.
By the way:
Outside of the changes of the Secure Act 2.0, the IRS recently announced that the 401(k) plan contribution limits increased by $2,000 from $20,500 in 2022 to $22,500 in 2023. Those 50 and above will be able to contribute an additional $7,500 in catch up contributions (up $1,000 from $6,500 in 2022) for a total contribution and catch-up of $30,000.The maximum contribution and catch-up in 2022 was $27,000.
IRA contributions in 2023 will increase by $500, from $6,000 to $6,500. Catch-up contributions remain at $1,000.
If you have any questions on the Secure Act 2.0 or other tax questions please contact us (301-953-3259) at Bormel, Grice & Huyett, P.A., your trusted tax advisor.