The SECURE Act 2.0 included sweeping changes for employer sponsored retirement plans. Some provisions were intended to make it easier and more tax-efficient for employees to save for retirement. Other changes aimed to give employers more flexibility to tailor their plan to worker needs. The law also included new rules to improve reporting and compliance.
As an employer plan sponsor, you need to understand which of the many SECURE Act 2.0 provisions apply to your plan. Implementing these required changes is vital to keeping your plan compliant and preserving its tax-advantaged status.
In addition to the mandatory changes, you also need to understand the new options available for improving your company retirement plan. By implementing the changes that mean the most to employees, you can increase the effectiveness of your plan and attract new talent.
SECURE Act 2.0 Key Changes to Defined Contribution Plans
There are several SECURE Act 2.0 provisions that apply to defined contribution plans – such as a 401(k), 403(b), SEP IRA, or SIMPLE IRA. Some of the following changes are mandatory while others are optional.
Mandatory Auto Enrollment
Starting after the enactment of the SECURE Act 2.0, new 401(k) and 403(b) plans must include an automatic contribution feature. This means that newly established plans must automatically enroll new employees at a contribution rate between 3% and 10%. Additionally, these contributions must increase by 1% per year until the employee is contributing at least 10% – but not more than 15% – of their salary. However, employees retain the right to opt out of the plan.
Auto enrollment is not required for plans established before December 29, 2022. There are additional exceptions for government and church sponsors, SIMPLE plans, businesses less than 3 years old, and companies with 10 or fewer employees.
Changes to Catch-Up Contributions
Catch-up contributions can be a great way for your older employees to save more for retirement. If your plan offers catch-up contributions, the limits for certain older workers will increase. Starting in 2025, workers between 60 and 63 will be able to contribute an additional $10,000 per year or 150% of the 2024 catch-up contribution limit. These amounts will be indexed for inflation starting in 2025.
An additional change to catch-up contributions applies to high earners. If you maintain a 401(k), 403(b), or government 457(b) plan which offers catch-up contributions, workers who earn more than $145,000 must contribute their catch-up contributions to a Roth account. This change was originally slated to begin on January 1, 2024, but the IRS recently announced an ‘administrative transition period’ which gives plan sponsors two additional years to implement the change.
Additional Roth Options
Employers with 401(k), 403(b), and government 457(b) plans now have the option to allow participants to receive employer matching and non-elective contributions on a Roth basis. This provision also requires that these Roth contributions be immediately vested.
This is a fundamental shift that could benefit a wide range of employees. However, many employers still have questions about how to administer this change. The IRS is expected to offer additional clarification, but no further information has been made available at the time of this article.
Along the same lines, the SECURE Act 2.0 permitted SEP and SIMPLE IRA plans to begin accepting Roth contributions. For many independent contractors and small business owners, this change makes these types of IRAs much more attractive.
Changes to RMD Rules
The SECURE Act of 2019 raised the RMD age, and the SECURE Act 2.0 further increased it. The age at which a participant must begin RMDs now depends on the year they were born. The new rules state:
- The RMD age is 73 for those who turn 72 after Dec. 31, 2022, and 73 before Jan. 1, 2033.
- The RMD age is 75 for participants who turn 74 after Dec. 31, 2032.
The IRS is expected to provide further clarification for participants born in 1959 since they will meet the criteria for both the age 73 and age 75 RMD requirements.
An additional change to RMD rules states that Roth accounts are no longer subject to RMDs before the account holder’s death. However, employers must still pay RMDs to participants who are required to take them under the old law.
SECURE Act 2.0 Key Changes to Defined Benefit Plans
Employers who sponsor defined benefit plans were not immune to change under the SECURE Act 2.0. The following key changes impact sponsors of these types of plans.
Annual Funding Notice Changes
Plans that issue Annual Funding Notices [AFNs] must change a few things for the 2024 plan year. These changes include:
- The AFN must provide financial information as of the end of the notice year rather than the beginning.
- Financial information in the AFN must be based on market value rather than the previous valuation basis.
- The AFN must include the average return on assets for the notice year.
- The AFN must include a table showing participant data as of the last day of the notice year and the two preceding years.
- The AFN must provide additional information about the Pension Benefit Guaranty Corporation’s [PBGC] guarantee.
Additionally, if the required funded status information is presented in a table, sponsors must include a statement that the PBGC calculation of plan termination liabilities may be greater than what is shown in the notice.
Lump Sum Window Disclosure Requirements
If your plan offers a lump-sum window, there are new requirements for what information you must provide. These additional disclosures are intended to help participants make a more informed decision between a lump-sum payment and an annuity while also providing additional information to the Department of Labor [DOL] and PBGC. These new requirements won’t take effect until after the DOL issues final regulation, which could be as late as December 29, 2023.
The new rule requires plan administrators to notify eligible participants at least 90 days before the election period begins. This notification must include details about the lump-sum option, cautionary statements, and a recommendation to consult a financial advisor. Additionally, plan administrators must notify the DOL and PBGC at least 30 days before the lump-sum window opens and include a copy of the notice given to participants. Finally, plan administrators must report to the DOL and PBGC within 90 days of the end of the lump-sum window including information about participants who elected the lump-sum option.
The SECURE Act 2.0 included over 90 total provisions. With a bill of that size, it can be difficult to know which changes you need to make and when you must make them. An experienced financial advisor can help you determine how your plan needs to adapt to remain in compliance.
Get Answers to Employer Sponsored Plan Questions with Meld Financial
The team of tax, legal, and investment professionals at Meld Financial have been helping companies optimize their employer sponsored retirement plans for nearly four decades. With our vast experience, we have the answers to your most pressing questions. To discuss your company’s plan, and how it should adapt to the new regulations, reach out to a member of our team today.
