The SECURE Act 2.0:
What Business Owners Need to Know

1. This law adds several layers of complication to running a retirement plan. Companies that aren’t proactively planning will end up in situations or get feedback from testing (which is always backward-looking) that may cause headaches. Accidentally excluding part-time employees or contributing catch-up contributions as pre-tax for high earners could result in frustrating conversations with service providers and employees. Additionally, results could require fixes that cost businesses money and time.
2. Employees are going to have questions. This law has already prompted a few questions from the employees of some of our clients. Employers who haven’t thought through these issues may be put in awkward positions of not appearing to proactively search for benefits for employees.
3. While the law adds complication, it also adds optionality and benefits. Several opportunities could allow you to improve your 401(k) for employees to ensure they have a great experience with their benefits.

We will continue to monitor this law and changes that impact the plans we manage today. Some clients may need to adjust their plan rules to ensure their retirement plan operates as they want it to. Luckily, most provisions don’t go into effect immediately (some don’t until 2027), so we have time. The new opportunities are relevant to everyone, so we will be sure to bring ideas to clients at our regular meetings. We'll help you weigh the pros and cons of new provisions to understand the full scope before jumping in.

If you are a current client of Plancorp and have questions, we encourage you to reach out to the Retirement Plan team at Plancorp. We’ll help review your questions and ensure you receive the necessary information.

If you’re not a Plancorp client, our team would love to discuss your company and retirement plan. We may be able to help you manage these new regulations. Please schedule a time to talk with us through this link.

Matt Basiden
Director of Retirement Plan Advisors

Expanding Automatic Enrollment
Effective for plan years beginning after 12/31/2024
Affects new 401(k), 403(b) plans, MEPS and PEPs
Required

• New 401(k) and 403(b) plans must include automatic enrollment (specifically EACA rules) with a default beginning rate of between 3% and 10%, a 90-day withdrawal provision, and an annual automatic escalation of 1% until a deferral rate of at least 10% is hit, up to a maximum of 15%.
• This provision will require clarifications and technical corrections. Currently, it requires plans adopted after the signing date of the law (12/29/2022) to abide by this provision. Plans started in 2023 may have to become automatic enrollment and escalation plans in 2025. We will be watching for the technical updates.
• The following type of plans are exempt from this rule: SIMPLE 401(k), Church & Government Plans, companies with 10 or fewer employees, companies in their first three years of business existence, 457 plans.

Increase Plan Startup Credits for Small Employers
Effective for plan years after 12/31/2022 (additionally retroactive to 2020)
Optional

• Currently, there is a start-up credit of up to 50% of start-up costs for beginning a retirement plan ranging from $500 to $5,000 depending on the employer's size. That credit is available for the first three years of a plan. SECURE 2.0 increases this credit from 50% to 100% of administration and startup costs.
• In addition, there is a new tax credit of up to $1,000 per employee (multiplied by the applicable percentage listed below). These credits aren’t available for employees who earn more than $100,000 (will be adjusted for COLAs) or defined benefit plans.
• These credits fully apply for employers with 50 or fewer employees and are phased out for employers with 51-100 employees.
• Employers cannot deduct contributions that qualify for the credit.

Retroactive Sole Proprietor Deferrals
Effective for plan years beginning after 12/29/2022
Affects sole proprietors & single-member LLCs with no employees and is only applicable in plan's first year

Optional

• Sole proprietors can now make retroactive first-year deferrals. The deferrals must be made by the tax return due date – without regard to any extensions. This does not apply to partnerships.

New Starter 401(k)
Effective for plan years beginning after 12/31/2023
Optional

• SECURE 2.0 created a new type of retirement plan for employee deferrals only. It can be a 401(k) or 403(b) plan.
• Employees must be automatically enrolled at a rate between 3% and 15% and are subject to the auto escalation rules going into effect in 2025 as currently written.
• The contribution limit is $6,000, with a catch-up of $1,000 for those 60 or older and that will be indexed to inflation. This may be updated to match the IRA number going forward, but currently is not.
• This plan would apply to all eligible employees. Though you can exclude union/non-resident employees. These plans will not be subject to ADP test or top-heavy testing.

Long-Time Part-Time (LTPT) Employee Coverage
Effective for plan years beginning after 12/31/2024 (though may affect plans earlier)
Affects 401(k), ERISA 403(b), MEP & PEP plans
Required

• Employees who work more than 500 hours for two consecutive years (and are older than 21) must be allowed to save their own money into the plan – matches and profit sharing are not required for these new employees if they don’t meet eligibility requirements for those provisions.
• SECURE Act 1.0 put the timing at three years and disregarded years before 1/1/2021 for this provision. So 401(k) plans with LTPT abide by the three-year rule initially – meaning some LTPT could join your plan on 1/1/2024. Then for years after 1/1/2025, you’ll follow the two-year rule. A part-time employee hired in 2023 and who works 500 hours in 2023 and 2024 would join your plan on 1/1/2025.
• 403(b) plans were not included in the original SECURE Act 1.0 rule but were in SECURE 2.0. 403(b) plans don’t have to count service before 1/1/2023, so your first LTPT employees would join on 1/1/2025. Students can continue to be excluded.
• There are additional vesting rules if an employer contribution (which is not required) is made to these employees. If that situation arises, please reach out to our team for guidance.
• How does this affect testing? LTPT employees aren’t required to receive a top-heavy contribution.
• This is another example of why it’s important to give your third-party administrator all your employee data every year. You should not remove employee data from records because you believe someone isn’t eligible for your plan. We can only provide good advice if we are receiving good information.

Catch Ups Must be Roth
Effective for tax years after 12/31/2023
Effects 401(k), 403(b), MEP & PEP plans
Required

• Beginning in 2024, all catch-up contributions (extra contributions your employees older than 50 can make) must be characterized as Roth contributions. This is applicable to all employees, though plans MAY make an exception for employees whose income in the prior year was less than $145,000. The $145,000 number will be adjusted for COLAs annually.
• SARSEP, SIMPLE IRA and SIMPLE 401(k) plans are exempt from this provision. It also appears to exclude self-employment and partnership income.
• How does this affect testing? This may be tricky. Sometimes during testing, it may make sense to change what was a regular deferral into a catch-up deferral for highly compensated employees. Catch-up contributions are not considered in certain tests. Doing that may make pre-tax deferrals into post-tax deferrals, and that would obviously affect the taxes of that individual. This is something that may require a congressional fix and clarification. We’ll be watching over the next few years for any updates.

Increase in Catch-Up Limits
Effective for taxable years beginning after 12/31/2024
Affects 401(k), 403(b), 457(b), MEP & PEP plans
Required

• This would increase the catch-up limits for participants who are age 60 anytime during the year but have not reached age 64 before the year's close.
• The catch-up for 401(k) and SIMPLE plans would be 150% of that particular year's catch-up amount for those respective plan types.

Paper statements
Effective for plan years after 12/31/2025
Effects 401(k), 403(b), Defined Benefit, MEP & PEP plans
Required

• Defined contribution plans must provide one paper statement annually unless a participant actively elects otherwise. Defined benefit plans must provide a paper statement every three years.

Roth Employer Contributions
Effective after enactment (12/29/2022)
Affects 401(k), 403(b), governmental 457(b), MEP & PEP plans
Optional for plans and employees

• This would allow employees to choose to make the contributions they receive from the employer to be treated as a Roth contribution. Employers have the option to allow this in their plans. These contributions would still be tax-deductible to the employers but will be taxable to employees.
• Employees can only choose to have money that is fully vested being treated as a Roth contribution, such as Safe Harbor Match, Safe Harbor Non-elective, or other immediately vested contributions.
• This provision will take a significant amount of effort on technology for payroll providers, CPAs and recordkeeping firms to implement. This won’t be a provision you can implement quickly — it may take several years.

Student Loan Matching
Effective for plan years after 12/31/2023
Affects 401(k), 403(b), 457(b), MEP & PEP Plans; SIMPLE IRA plans
Optional

• This provision explicitly allows employers to treat “Qualified Student Loan Payments” as deferrals for matching purposes. Employees must certify that they made payments on the loan, and employers can rely on employee certification.
• If employers implement this, they must use the same match provisions (formula, vesting, etc.) as they do for typical cash deferrals.
• Employee loan repayments and deferrals combined are limited to the normal 402(g) limit ($22,500 in 2023).
• How does this affect testing? You can perform separate ADP tests for those employees who get a student loan match.

Increase Cash-Out Limit
Effective for tax years after 12/31/2023
Affects 401(k), 403(b), MEP & PEP plans
Optional

• Since 1997, the cash-out limit has been $5,000. This regulation updates the force-out limit to $7,000 which will not be indexed or subject to COLAs.

Small Deferral incentives Allowed
Effective for plan years after 12/29/2022
Affects 401(k), 403(b), MEP & PEP plans
Optional

• Previously, employers could not incentivize employees to participate in retirement plans. This new law allows sponsors to provide small and immediate financial incentives for participation. These financial incentives cannot be paid for by plan assets and are taxable to the business. A typical example is a small gift card.

Emergency Savings Accounts (“ESAs”)
Effective for plan years beginning after 12/31/2023
Affects 401(k), 403(b), MEP & PEP plans
Optional

• Plans can set up ESAs as a “sidecar” to their retirement plan. Participants can make Roth contributions to their ESA. Once an ESA reaches $2,500 (will be adjusted for COLAs), no more contributions will be accepted.
• Plans will be able to establish eligibility requirements for these accounts. Highly compensated employees will not be allowed to save into ESAs.
• Withdrawals from these account types would be tax- and penalty-free, without a need to attest to an emergency for the participant. They must be allowed to do at least one distribution per month with no fees allowed on the first four withdrawals per plan year.
• If you want to explore adding these, please contact us for additional requirements.

Retroactive Increase in employer contribution
Effective for plan years after 12/31/2023
Affects 401(k), 403(b), MEP & PEP plans
Optional

• This provision allows employers to amend their plan to retroactively increase benefits or add nonelective employer contributions, though you cannot retroactively increase a match formula. The deadline to make this update is the due date of your tax return, including extensions.

Qualified Birth & Adoption Distributions (“QBADs”)
Effective active after enactment (12/29/2022)
Affects 401(k), 403(b), Governmental 457(b), MEP & PEP plans
Optional

• SECURE Act 1.0 allowed a new distribution type for the birth or adoption of a child. This distribution had to occur within one year of the birth or adoption and allowed a $5,000 distribution per child to be exempt from the 10% early withdrawal penalty.
• SECURE 2.0 puts in a technical fix that allows people to repay this distribution over a three-year period.

Emergency Distributions
Effective active after enactment (12/29/2022)
Affects 401(k), 403(b), Governmental 457(b), MEP & PEP plans
Optional

• Allows for a new distributable event type called “Emergency Distributions,” allowing one distribution per year up to lesser of $1,000 or 50% of vested account balance, with no 10% penalty. These are much broader than hardship distributions, not requiring one of the seven safe harbors associated with hardships.
• This distribution is limited to one per year, and employees can repay this distribution within three years.
• Employees cannot take another one of these distributions within three years unless they have repaid the prior distribution or their deferrals into the plan are equal or above the amount distributed.

Hardship Distribution Certification
Effective for plan years after date of enactment (12/29/2022)
Affects 401(k), 403(b), 457(b), MEP & PEP plans
Optional

• Previously employers had to certify that employees met the definition of a hardship to process a hardship distribution. Now employers can rely on employee certification that they’ve met the requirements for a hardship. Employers can still require documentation if they wish.
• Treasury may provide regulations for exceptions in cases where there is actual knowledge by the employer to the contrary, or cases of employee misrepresentation.

Permanent Disaster Relief
Effective for disasters occurring after 1/26/2021
Affects 401(k), 403(b), MEP & PEP plans
Optional

• This rule made permanent something that had been on a case-by-case basis for congress. When a disaster is declared in a state, county or region, this would allow participants to take a “Qualified Disaster Distribution” if their plan allows it. The participants' principal address has to be in the disaster location. The distribution must be taken within 180 days of the event.
• Participants could take a distribution up to $22,000 (a lifetime maximum limit) without the normal 10% additional tax if under the age of 59.5. The taxes for this distribution would be paid over three years by the participant. Participants can repay the distribution within a three-year period to any tax-preferred account.
• In addition, this allows plans to offer an increased loan limit (from $50,000 to $100,000) to participants and allow them to extend their loan schedule by up to one year.

Domestic Abuse Victims Distributions
Effective for plan years after 12/31/2023
Affects 401(k), 403(b), Governmental 457(b), MEP & PE plans
Optional

• This creates a new distributable event for victims of domestic abuse. Victims can take the lesser of $10,000 (will be adjusted for COLAs) or 50% of their vested account balance from the plan. There will be no 10% penalty due on these distributions, though taxes will still be due on the distribution.
• This distribution relies on self-certification from an employee, needs to occur within one year of the abuse, and spousal consent is NOT required for this distribution.
• The distribution amount can be repaid over three years.
• Domestic abuse is defined broadly and does not require a police report or other types of certification.

Terminal Illness Distribution
Effective as of enactment date (12/29/2022)
Affects 401(k), 403(b), Governmental 457(b), MEP & PEP plans
Required

• This distribution would waive a 10% penalty for distributions to terminally ill patients where it is reasonably expected to result in death within seven years.
• This does have to be certified by a physician. Most importantly, this is not a new type of distributable event, meaning an employee has to be eligible to take money from the plan by another means in order to receive this distribution.
• This distribution can be repaid to the plan within three years.
• You must add this to your plan, though this does not create a new distributable event type. You can follow your process for other distribution types. It will be up to the participant and their CPA to ensure the 10% penalty is not paid.

Distributions for Long-Term Care
Effective for distributions made after 12/29/2025
Affects 401(k), 403(b), Governmental 457(b), MEP and PEP plans
Optional

• This creates a new distributable event for employees to take a distribution to pay for the insurance premiums related to long-term care insurance. The maximum distribution is the lesser of $2,500 per year (will be adjusted for COLAs), 10% of the vested balance or the actual premium for the year.
• This distribution type is not subject to a 10% additional tax, though the distribution can only be made for policies that provide “meaningful financial assistance.”

Spousal/Child Attribution Fix
Effective for plan years after 12/31/2023
Affects 401(k), 403(b), Defined Benefit, MEP & PEP plan
Required

• Previously if a married couple each had their own unrelated businesses and had a minor child, because of family attribution rules, those two unrelated businesses would be considered a controlled group for retirement plan purposes.
• This creates a new exception that would disregard community property and minor child between spouses for retirement plan purposes — meaning no controlled group for spouses' unrelated businesses.

Plan Amendments
Last day of first plan year beginning on or after 1/1/2025
Affects 401(k), 403(b), 457(b), MEP & PEP plans
Optional

• This allows plans to update their operational procedures and then be granted operational failure relief if they adopt an amendment by the due date. The plan must operate in accordance with the law and amendment as adopted, and the amendment must be retroactively effective.
• This gives people time to make changes to their plans — both mandatory changes and discretionary changes related to both SECURE Acts, the CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020.

Retirement Savings Lost and Found
Must be created by 12/31/2024
Affects 401(k), 403(b), Defined Benefit, MEP & PEP plans
Required

• This requires the Department of Labor, in consultation with the Department of Treasury, to create an online searchable database with information regarding unclaimed benefits.

Elimination of Penalty on Distributions of Earnings on Excess Contributions
Affects 401(k), 403(b), Governmental 457(b), MEP and PEP plans
Effective after enactment (12/29/2022)

• If excess contributions earnings are distributed from a retirement plan in a timely manner, the earnings are no longer subject to a 10% penalty.  

Auto-Portability
Effective for transactions after 12/29/2023
Affects 401(k), 403(b), Governmental 457(b), MEP and PEP plans
Optional

• This creates a new prohibited transaction exemption which will allow auto-portability. Auto-portability aims to replace the current mandatory cash-out and defaulted IRA rollover system.
• Currently, when an employee changes jobs, if they have less than $1,000 in their old employer plan they can be forced to cash out that balance. If they have between $1,000 and $5,000 (perhaps up to $7,000 when the cash-out limit is updated) they are often auto-rolled into an IRA and invested in a cash-like investment. That’s often not a good solution for the employee.
• This solution creates a consortium of recordkeepers setting up a system to automatically match employees' accounts across platforms. In the future, a participant could have their old employer's 401(k) automatically mapped to their new employer’s plan.
• This is going to be a huge positive for workers. It will take time, and not all recordkeepers are on board yet (most of the major ones are), but this has the ability to significantly help workers, especially the lowest-paid group.

Reduced Participant Disclosures for Unenrolled Participants
Effective for plan years after 12/31/2022
Optional

• Unenrolled participants with no balances are no longer required to receive certain disclosures, but they must receive annual reminders of their eligibility and enrollment deadlines, any documents they request and an SPD at the time of initial eligibility.
• While this sounds great initially, it will be simpler and easier to provide all employees with notices rather than try to parse out who should get what.

Savers Match
Effective for tax years after 12/31/2026
Affects 401(k), 403(b), Governmental 457(b), MEP and PEP plans

• Currently, there is a tax credit called a SAVER’s Credit. In tax years beginning after 12/31/2026, this would be replaced by a SAVER’s Match.
• This would be a government match of up to $2,000 that must be deposited into a retirement vehicle such as a 401(k), 403(b) or IRA unless it is smaller than $100. The match would be reduced by aggregate distributions for the participant or spouse in the taxable year and the two preceding taxable years and the due date of the tax return for the year of the credit unless the dollars are rolled over.
• The match would be up to 50% of retirement plan contributions by the taxpayer, up to $2,000. The 50% would be phased out over certain income limits.
• The dollars, if in a plan such as a 401(k), would be fully vested, would be disregarded for most testing and could not have hardship distributions taken based on its balance.

Increased Required Minimum Distribution (“RMD”) Age
Effective for tax year 2023
Affects 401(k), 403(b), MEP & PEP plans, as well as IRAs

• This rule increases the Required Minimum Distribution age. Active employees over the RMD age do not need to take an RMD from their 401(k) plan. An active owner who owns more than 5% of the business or based on family attribution rules owns more than 5% of a business, is required to make an RMD.
• Those born 1951-1959 are required to begin their RMD at age 73. Those born in 1960 or later must begin their RMD at age 75 which would occur in the 2030s. There is a technical error that requires a fix, but this interpretation appears to be what is intended by congress.

Reduced RMD Excise Tax
Effective for tax years after 12/29/2022
Affects 401(k), 403(b), 457(b), MEP & PEP plans, as well as IRAs

• Previously, if you had failed to take your RMD at the proper time, there was a 50% excise tax on the amount you failed to distribute. This new change brings that excise tax down to 25%.
• In addition, the penalty can fall to 10% if additional rules are followed.

Statue of Limitations Penalties for RMDs and Excess Contributions
Effective active after enactment (12/29/2022)

• This institutes a new statute of limitations for penalties on RMD failures (three years) and excess contributions (six years). The clock begins with the filing of a 1040 form.

Surviving Spouse RMDs
Effective for plan years after 12/31/2023
Effects 401(k), 403(b), MEP & PEP plans
Optional

• This aligns 401(k), 403(b) & 457 accounts with how IRAs work. Essentially, a surviving spouse can elect to be treated as an employee for RMD rules, allowing spouses to utilize the Uniform Lifetime Table.

No lifetime Required Minimum Distributions from Roth Plans
Effective for tax years after 12/31/2023
Effects 401(k), 403(b), MEP & PEP plans
Required

• This aligns Roth accounts in a retirement plan with Roth IRAs. No RMDs are required to be taken from a Roth account in a 401(k) or 403(b). Previously, RMDs were required from these accounts.
• This rule does NOT apply to initial distribution if required in 2023, even if you take it in 2024.

Hardship Distributions from 403(b)
Effective for plan years beginning after 12/31/2023
Optional

• Hardship rules for custodial 403(b) plans now align with 403(b) annuities and 401(k) plans. Employees can distribute from deferrals, QNECs, QMACs, safe harbor contributions and earnings. In addition, there’s no requirement to take a loan first.

403(b) MEPS/PEPs Allowed
Effective for tax years after 12/31/2022
Optional

• Current law has been ambiguous on 403(b) MEPs and PEPs. This new law specifically allows 403(b) MEPs and PEPs. Church Plans are excluded from this.
• Like SECURE Act 1.0, these MEPs and PEPs have relief from the “one bad apple rule” and are one plan for 5500 and 8955-SSA purposes.

403(b) Investments
Effective after enactment (12/29/2022)
Optional

• 403(b) plans can now invest in group trusts such as Collective Investment Trusts (CITs) under ERISA law, though a securities law change will be necessary to be passed for plans to implement this.

10% Higher Deferrals for SIMPLE IRAs and SIMPLE 401(k)s
Effective for tax years after 12/31/2023
Optional

• This allows higher deferral limits in SIMPLE Plans. The deferral limit would be increased by 10% of what is otherwise applicable. This provision is automatic for plans with fewer than 26 eligible employees.
• For plans with between 26-100 employees, you can use the higher limits if you increase your match to 4% or your nonelective to 3%. Employers with more than 100 employees are not allowed to use SIMPLE plans.
• These updates only apply if the employer has not had another plan within three years.

SEP & SIMPLE Roth IRAs
Effective for tax years after 12/31/2022
Optional

• Contributions to SEP or SIMPLE plans can be designated as Roth contributions. Both employer and employee contributions can be Roth contributions. As of February 2023, no custodian or platform has developed the technology to implement this.

Additional Nonelective employer contribution for SIMPLE IRA and SIMPLE 401(k)
Effective for tax years after 12/31/2023
Optional

• Allows discretionary non-elective employer contributions to employees up to the lesser of 10% of compensation or $5,000. This is in addition to the normal SIMPLE contributions.

Mid-year conversion from SIMPLE IRA to Safe Harbor 401(k)
Effective for plan years after 12/31/2023
Optional

• Before this change, any SIMPLE IRA had to be run for a calendar year. This allows employers to change to a different plan type (Safe Harbor 401(k) plan, a QACA 401(k) plan or a Starter 401(k) plan) mid-year.
• The deferral limit will be prorated by days between the SIMPLE IRA and the new plan. T
• In addition, this provision includes the waiver of the SIMPLE IRA two-year 25% additional tax penalty for amounts rolled over to the new plan.

Catch-Up Contributions
Effective for tax years after 12/31/2023
IRAs

• This would make catch-up contributions to IRAs, which were not previously indexed to inflation in $100 increments.

• QLACs (Qualified Lifetime Annuity Contracts)
• QACA technical correction from SECURE Act 1.0
• Changes to the EPCRS system
• Changes to Qualified Charitable Distributions
• Changes to Substantially Equal Periodic Payments/72(t) account
• MEP & PEP changes
• Group of Plans Annual Audit
• Defined Benefit Plan changes
• 457(b) Deferral Elections
• Rollovers from 529 accounts
• Military spouses’ retirement plan eligibility tax credit
• Modification of RMD rules for special needs trusts
• Income exclusion for disabled first responders
• Exemptions from early distribution penalty changes for Public Safety Officers

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Disclosure

This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.

Plancorp is a registered investment advisor with the Securities and Exchange Commission ("SEC") and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not imply a certain level of skill or training. Please refer to our Form ADV Part 2A disclosure brochure and our Form CRS for additional information regarding the qualifications and business practices of Plancorp.