Key SECURE 2.0 Retirement Plan Changes

The SECURE 2.0 Act of 2022 builds on the 2019 SECURE Act to address challenges in the nation’s retirement savings system. Its goals are to broaden access to retirement plans, encourage higher savings rates, and provide more flexibility for managing funds during a career and in retirement.

The act introduces new incentives for employers and employees, updates regulations for modern work patterns, and creates new tools for more effective saving. These provisions impact how retirement plans are structured and used nationwide.

Modifications to Retirement Plan Contributions

Beginning in 2026, individuals who earned more than $145,000 in the previous year and participate in a 401(k), 403(b), or governmental 457(b) plan must make their catch-up contributions on a Roth (after-tax) basis. These contributions are taxed in the year they are made, allowing for tax-free qualified withdrawals in retirement.

The act also adjusts catch-up contribution limits. The $1,000 catch-up limit for Individual Retirement Accounts (IRAs) began indexing to inflation in 2024. Effective in 2025, a higher catch-up limit is established for workplace plan participants aged 60 through 63, allowing them to contribute up to $10,000 or 150% of the regular catch-up amount for that year, whichever is greater.

Employers can now assist employees with student loan debt. The act permits employers to make matching contributions to an employee’s retirement plan based on their qualified student loan payments. This allows employees to receive a company match while paying down student loans, even if they cannot contribute to their plan. This optional feature became available in 2024.

The act allows for the creation of Roth versions of SEP and SIMPLE IRAs, which was effective in 2023. Previously, these plans only allowed pre-tax contributions. This change gives participants the choice to make after-tax contributions in exchange for tax-free withdrawals in retirement.

Contribution limits for SIMPLE plans increased in 2024. The law raises the annual employee deferral and catch-up contribution limits. The act also allows employers to make additional contributions to employee accounts on top of their required matching or nonelective contributions.

Updates to Withdrawals and Required Distributions

The age for Required Minimum Distributions (RMDs) has increased. The RMD age was pushed from 72 to 73 starting on January 1, 2023, for individuals who turn 72 in 2023 or later. The age is scheduled to increase again to 75 on January 1, 2033, giving investments more time to grow tax-deferred.

The financial penalty for failing to take an RMD has been reduced. The penalty is now 25% of the shortfall amount. If the individual corrects the mistake in a timely manner, the penalty can be further reduced to 10%.

The act introduces new exceptions to the 10% penalty for early withdrawals from retirement accounts before age 59½. These include penalty-free withdrawals for the following circumstances:

• Up to $1,000 per year for unforeseeable personal or family emergency expenses.
• For victims of domestic abuse, the lesser of $10,000 (indexed for inflation) or 50% of their vested account balance.
• For individuals certified by a physician as having a terminal illness.
• Up to $22,000 for those affected by federally declared major disasters.

Starting in 2024, RMDs are no longer required from Roth accounts in employer-sponsored plans, such as 401(k)s, during the account owner’s lifetime. This aligns them with Roth IRA rules and allows funds to grow tax-free without a mandatory withdrawal.

New Retirement Plan Design and Enrollment Mandates

The act mandates automatic enrollment for most new 401(k) and 403(b) plans established after December 29, 2022. Effective for plan years after December 31, 2024, employers must automatically enroll eligible employees. The initial default contribution rate must be at least 3% but no more than 10% of the employee’s pay.

These plans must also feature automatic escalation, increasing the contribution rate by 1% each year until it reaches between 10% and 15%. Employees can opt out or change their contribution rate at any time. Plans existing before the law’s enactment are grandfathered and not subject to this mandate.

The act authorizes the Pension-Linked Emergency Savings Account (PLESA). Employers can offer non-highly compensated employees the option to contribute to this account within their retirement plan. Contributions are made on a Roth basis and capped at $2,500, with withdrawals being tax-free and penalty-free.

Plan eligibility for part-time workers is expanded. The SECURE Act’s requirement for long-term, part-time employees to participate in a 401(k) plan was shortened. The service requirement is reduced from three years of at least 500 hours of work to two years, effective after December 31, 2024.

Key Provisions for Rollovers and Tax Credits

The act allows rollovers from long-term 529 college savings plans to Roth IRAs under certain conditions. The 529 account must be open for over 15 years, and the rollover goes to the beneficiary’s Roth IRA. There is a lifetime rollover maximum of $35,000, and annual rollovers are subject to Roth IRA contribution limits.

Tax credits for small businesses that establish retirement plans are enhanced. The start-up credit for administrative costs is increased to 100% for employers with up to 50 employees.

A new tax credit incentivizes small employers to make contributions for their employees. The credit is based on a percentage of employer contributions, up to $1,000 per employee. The full credit is for employers with 50 or fewer employees and phases out for those with 51 to 100 employees.

Starting in 2027, the Saver’s Credit will be replaced by the Saver’s Match. The federal government will provide a direct matching contribution of 50% on the first $2,000 an eligible individual contributes to their retirement account. This match of up to $1,000 will be deposited directly into the individual’s IRA or workplace plan. Eligibility for the full match is subject to income limitations.