The SECURE 2.0 Act of 2022 was enacted on December 29, 2022, and introduces major changes to 401(k) plans, particularly those sponsored by small businesses. The law is designed to increase retirement plan coverage, enhance savings, and simplify existing rules. Employers need to familiarize themselves with the new provisions to ensure their 401(k) plans comply with the updated regulations.
Building on the SECURE Act of 2019, the new law aims to expand retirement plan access and savings. It introduces updates to distribution rules, participant disclosures, and plan testing procedures, among other changes. Here are a few summaries on key 401(k) provisions.
Tax Credits for Small Businesses
Startup Tax Credits
Section 102 boosts the tax credit for establishing new plans from 50% to 100% for companies with up to 50 employees. Small businesses may also receive an additional credit for employer contributions, up to $1,000 per employee. Full credit applies to employers with 50 or fewer employees, with reductions for those with 51-100 employees. The percentage starts at 100% for the first two years and decreases each subsequent year until it ends after the fifth year.
This section applies to taxable years starting after December 31, 2022.
Military Spouse Tax Credit
Section 112 offers a tax credit to small businesses that hire military spouses and allow them special eligibility and vesting terms in retirement plans. The credit is $200 per military spouse plus 100% of employer contributions (up to $300), with a maximum tax credit of $500 per military spouse for three years. This credit does not apply to highly compensated employees.
This section takes effect for taxable years starting after December 29, 2022.
Automatic Enrollment for New Plans
Under Section 101, new 401(k) plans must automatically enroll eligible participants. The starting enrollment rate must be between 3% and 10%. Each year, the rate increases by 1% until it reaches a range of 10% to 15%. Plans established before December 29, 2022, are exempt. Exceptions exist for small businesses with 10 or fewer employees, new businesses (operating for less than three years), church plans, and government plans.
This provision applies to plan years starting after December 31, 2024.
Faster Eligibility for Part-Time Workers
Currently, employees must work at least 1,000 hours in a year or 500 hours for three consecutive years to join their employer’s plan. Section 125 changes the three-year requirement to two years.
This rule starts for plan years beginning after December 31, 2024.
Employee Contributions
Mandatory Roth Catch-Up for High Earners
Section 603 mandates that catch-up contributions to qualified retirement plans must be made in a Roth account for participants whose prior year’s income exceeds $145,000 (adjusted for inflation).
This change takes effect for taxable years starting after December 31, 2023.
Increased Catch-Up Contribution Limit
Section 109 raises the catch-up limit for individuals aged 60, 61, 62, and 63 to either $10,000 or 50% more than the standard catch-up limit ($7,500 in 2023). After 2025, these amounts will adjust for inflation.
This provision starts for taxable years after December 31, 2024.
Emergency Savings Accounts
Section 127 allows employers to offer short-term emergency savings accounts (ESAs) to employees who are not highly compensated. ESAs must be funded through Roth contributions, capped at $2,500, or a lower limit set by the employer. Participants can make at least one withdrawal per month, with the first four withdrawals per year being fee-free.
This provision applies to plan years starting after December 31, 2023.
New Deferral Deadline for Sole Proprietors
The SECURE Act allows employers to set up a new 401(k) plan after the taxable year ends but before the employer’s tax filing date, treating the plan as if it was established on the last day of the taxable year. Section 317 permits plans sponsored by sole proprietors or single-member LLCs to receive employee contributions up to the date of the employee’s tax return filing date for the initial year if the owner is the only employee.
This change applies to plan years starting after December 29, 2022.
Employer Contributions
Roth Matching and Nonelective Contributions
Currently, employers contribute matching and nonelective contributions on a pre-tax basis. Section 604 allows participants to choose to have these contributions made as Roth contributions if their plan permits.
This rule applies to contributions made after December 29, 2022.
Saver’s Match
Section 103 replaces the saver’s credit with a direct government match for taxpayer IRA or eligible retirement plan contributions. The government match is 50% of IRA or retirement plan contributions up to $2,000 per person. The match phases out between $41,000 and $71,000 for joint filers, $20,500 to $35,500 for single or married separate filers, and $30,750 to $53,250 for head-of-household filers.
This provision starts for taxable years beginning after December 31, 2026.
Matching of Student Loan Payments
Section 110 allows employers to make matching contributions under a 401(k), 403(b), or SIMPLE IRA plan for qualified student loan payments. Qualified payments are defined as debts incurred solely to pay for qualified higher education expenses. The plan may conduct separate nondiscrimination testing for employees who receive matching contributions for student loan repayments.
This provision takes effect for contributions made for plan years beginning after December 31, 2023.
Participant Distributions
Required Minimum Distributions
The SECURE 2.0 Act introduces several changes to the Required Minimum Distribution (RMD) rules:
- Section 107 raises the RMD starting age from 72 to 73 (effective January 1, 2023) and then to 75 (effective January 1, 2033).
- Section 302 reduces the penalty for not taking an RMD from 50% to 25%. If the failure is promptly corrected, the penalty is further reduced to 10%. This change takes effect for taxable years beginning after December 29, 2022.
- Section 325 removes the pre-death RMD requirement for Roth accounts, starting for taxable years beginning after December 31, 2023.
- Section 327 allows a surviving spouse to be treated as the deceased employee for RMD purposes, starting for calendar years beginning after December 31, 2023.
Small Balance Cash-Outs
Currently, employers can transfer the 401(k) account of former employees to an IRA if their balance is no more than $5,000. Section 304 raises this limit from $5,000 to $7,000.
This rule applies to distributions made after December 31, 2023.
Hardship Distribution Certification
Section 312 allows employees to self-certify under specific circumstances that they have experienced a hardship event for the purpose of taking a hardship withdrawal.
This provision takes effect for plan years starting after December 29, 2022.
Disaster Distributions
Section 331 establishes permanent rules for using retirement funds in case of a federally declared disaster. Up to $22,000 can be distributed from 401(k) plans to affected individuals.
This rule applies to disasters occurring on or after January 26, 2021.
Emergency Distributions
The standard 10% additional tax on early 401(k) distributions may be avoided if certain exceptions apply. Section 115 provides an exception for certain distributions used for emergency expenses, which include immediate financial needs related to personal or family emergencies.
This rule applies to distributions made after December 31, 2023.
Penalty-Free Early Distributions
SECURE 2.0 adds more exceptions to the 10% early distribution tax:
- Section 314 allows penalty-free distributions for victims of domestic abuse, effective for distributions made after December 31, 2023.
- Section 326 permits penalty-free distributions for individuals with a terminal illness, effective for distributions made after December 29, 2022.
- Section 334 allows penalty-free distributions up to $2,500 per year for paying premiums for specified long-term care insurance contracts. This change starts with distributions three years after December 29, 2022
Official Secure 2.0 Document per the Senate Committee on Finance
