In the waning hours of the 118th US Congress, on December 27th 2022, some of the most consequential and sweeping changes to retirement planning in generations became law. Included in the 2022 Omnibus spending bill, “Secure Act 2.0” will fundamentally alter how Americans approach saving for retirement. Many excellent articles and resources have already been published on the topic, and the stunning breadth of changes is too much for us to cover here, but certain changes do stand out to us.

For Employers: Automatic Enrollment and Escalation (mandatory)

Companies with more than 10 employees looking to begin offering a 401(k) or Profit-Sharing Plan, by far two of the most common plan types, will need to include automatic enrollment of employees. This changes the model from the current “opt-in”, whereby an employee elects to participate in a plan, to an “opt-out” model where an employee elects to not participate.

New plans will also need to include the automatic escalation of employee contributions each year. Under the new rules an employee’s deferral will start at 3% and increase by 1% annually until the total deferral reaches 10%. Employees can again opt-out of this escalation but will need to do so each year.

New plans established after December 29, 2022 will need to come into compliance with these requirements by January 1, 2025. This is not optional – all new plans (exceptions below) will need to comply.

These rules do not apply to existing 401(k) or Profit-Sharing plans, new plans where the employer has fewer than 10 employees, plans established by a company in existence for less than three years (but such companies will need to include these provisions by their fourth year) or other types of retirement plans such as SEPs, SIMPLE, IRAs, etc.

For Employers: Part Time Workers (mandatory)

Prior to the passage of this act employers could exclude most part-time workers from participating in a retirement plan. Full-time was defined in law as an employee having worked 1000 hours in a plan year. Changes made in 2021 required employers to extend eligibility to employees who worked at least 500 hours in any three consecutive twelve-month periods. With passage of the Omnibus bill in December, employees who work 500 hours in any two consecutive twelve-month periods will now be eligible.

For Employers: Emergency Savings and Student Loan Matching (optional)

A significant issue with retirement plans is that young people often do not participate even though they typically see the biggest benefit of tax-deferred growth. Reasons for this low participation abound; from a lack of financial education, to lower overall compensation, to student loans, etc., we see across the industry poor participation rates amongst under-30s. To partially address this gap Employers will be able to match qualified student loan repayments inside the retirement plan as if the employee was deferring into the plan from their paycheck. Employees will also be able to create an Emergency Savings bucket within their retirement account from which to draw in the event of a covered emergency.

These are optional provisions that go live January 1, 2024. Employers may choose to implement these changes but are not required.

For Employers: Roth Matching or Non-Elective contributions (optional)

Previously an employer who matched an employee’s contributions did so on a traditional pre-tax basis, regardless of whether the employee contributed on a traditional pre-tax or Roth post-tax basis. Beginning this year employers may make matching contributions on a Roth basis. Likewise, an employer who made a non-elective contribution (i.e. a contribution that goes to all eligible employees regardless of whether they are deferring from their own paycheck) did so on a traditional pre-tax basis. Now, employees may choose for these contributions to go in as Roth/post-tax contributions.

These are optional provisions that go live January 1, 2024. Employers may choose to implement these changes but are not required.

For Individuals: Changes to Catch-Up Contributions

Employees over the age of 50 may elect to contribute additional money, above and beyond the normal maximums, to their retirement account. These “catch-up” provisions are indexed annually to inflation, as is the normal contribution limit. Starting in 2025 an additional catch-up contribution will be available to individuals from 60 to 63 years of age – they will be able to contribute an additional $10,000 or 150% of the standard catch-up amount (whichever is greater). This is good news for employees approaching their retirement who want to set aside as much as possible.

Another change of note to catch-up contributions: Beginning in 2024, all catch-up contributions made by employees who make over $145,000 per year will must be Roth/post-tax contributions, meaning the employee will need to pay their income taxes on the catch-up amount before it goes into the retirement plan.

For Individuals: Required Minimum Distribution Age Increases

Currently retirement plan participants who have made traditional pre-tax contributions must begin taking withdrawals by the time they reach age 72. That age is now increased to age 73 and will increase again to age 75 in 2033.

Note: Any individual who turned 72 in 2022 will still need to complete their RMD prior to filing their taxes, as the changes took effect on January 1st 2023.

Other Changes

• Increased savers’ credit: Eligible individuals can receive a pre-tax federal governmental matching contribution to their retirement plan if they are eligible to receive the savers’ credit. (Effective 1/1/2027)
• Penalty-free emergency withdrawals: Employees will be able to take a once-annual maximum $1000 emergency withdrawal that is not subject to additional tax penalties. Normal income tax rules will still apply (effective 1/1/2024)
• Self-certification of hardship withdrawals: Normally an employer/plan sponsor would be required to certify that an actual financial hardship exists before approving such requests. Typically, this involved requesting documentation from the requesting employee. Going forward plans may rely on self-certification from the employee. (Effective 1/1/2022)
• Disaster distributions: Participants may take an emergency distribution during federally declared disasters without incurring any tax penalties above and beyond normal income taxes. The distribution may be spread over three years when filing income taxes, and certain amounts may be put back in the plan if not used. Special rules apply, max amount of distribution is $22,000 (Effective for disasters occurring after 1/26/2021)
• Disaster Loans: Participants may also request a loan during a federally declared disaster, the total amount of which may be up to $100,000 as opposed to $50,000 or 50% of account balance – whichever is smaller – under normal loan guidelines. (Effective for disasters occurring after 1/26/2021)
• Withdrawals in cases of domestic abuse: Permits withdrawals up to $10,000 or 50% of an individual’s account balance. Normal tax rules apply, but no penalty shall be applied. Amounts can be repaid to the plan over three years. (Effective 1/1/2024)
• Terminal Illness Withdrawals: Participants diagnosed by a physician with a terminal illness may take penalty-free distributions. Normal tax rules will apply. (Effective 12/27/2022)
• Roth account RMDs: Required Minimum distributions will no longer be required from Roth accounts within an employer sponsored plan. (Effective 1/1/2024)

There are myriad other changes (some mandatory, others discretionary) this law makes to the retirement system in the United States. Navigating plan compliance has always been tricky, but wholesale changes to the rules and regulations have made compliance trickier than ever. Member companies who join the One Member Retirement System have the advantage of us monitoring compliance for you. If you’re interested to learn how Secure 2.0 will impact your plan, please reach out to schedule a meeting!

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Andrew Seaborg is registered representative of Lincoln Financial Advisors Corp. Andrew Thompson is also a registered representative of Lincoln Financial Advisors Corp, working in a support capacity. Securities and investment advisory services offered through Lincoln Financial Advisors, a broker-dealer (member SIPC) and registered investment advisor. Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.

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