Employers and employees alike are generally familiar with 401(k) plans — retirement contribution plans that allow people to save money for retirement while deferring taxation on those funds. In the past 10 - 15 years, 401(k)s have evolved to address the needs of an ever-changing workforce — one that has not consistently planned well for financial security in retirement. In its Report on the Economic Well-Being of U.S. Households in 2022, the Federal Reserve found that while about 75% of non-retirees had some kind of retirement savings, only 31% of them reported thinking their retirement savings was on-track. 

The latest iteration of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 — commonly called SECURE 2.0 — is part of the retirement-planning evolution. Signed into law in December 2022, its intent is to encourage non-retirees to make better use of their 401(k) plans to save for retirement. 

David B. Wentz, CEO of Tax Favored Benefits, a wealth management and retirement planning consulting firm based in Overland Park, Kan., gave a webinar in May to help equipment dealers offering 401(k) plans understand how SECURE 2.0’s more than 90 provisions could affect those plans. He and colleague Brandon Baedke, vice president of retirement plans for Tax Favored Benefits, discussed the important aspects of the act that are currently in effect as well as those taking effect in the near future.

Despite the size of SECURE 2.0, Wentz calls it “a really nice piece of legislation” and advises against panicking over its requirements.

“If you have an existing plan, some of it's mandated,” he says. “Most of it you can opt in or out of. If you don't have a plan, there's some things that are going to be mandated.” He adds that while much of it does apply to 401(k) plans, “there is a fair amount that applies to not-for-profits and government.”

Immediately Applicable Items 

Wentz identified several items that SECURE 2.0 made applicable immediately upon its passage.

Calling it a positive aspect of the act, Wentz says that SECURE 2.0 allows those affected by a natural disaster — a hurricane, tornado or flooding, for example — to “get access to their 401(k) money and profit sharing money exempt from the 10% penalty” plans typically charge for early withdrawals. Baedke adds that the provisions typically apply to federally declared disasters, with the timeframe for withdrawing funds having expanded to 180 days following the disaster event.

This is related to the ability of plan participants to make withdrawals from their 401(k) plans without penalty in cases of financial hardship — something that precedes the SECURE Act. Such provisions typically required the employer to certify the nature of the hardship, ensure it complies with one of the IRS’ allowable reasons and see that it doesn’t exceed the limits of the financial need. SECURE 2.0 allows plan participants to self-certify that their request meets those requirements.

“You [the employer] don't have to provide any proof [of hardship],” Baedtke says. “The participant self-certifies a form saying, ‘I need this for this reason.’ The liability is off the employer for signing off.”

SECURE 2.0 will also help parents needing to borrow against their 401(k) to pay for costs associated with the birth of a child or an adoption, Wentz says. The act allows a 3-year time frame in which they can repay that loan. Wentz says it’s “another really positive thing for families — adoption is a really expensive process.”

According to Wentz, SECURE 2.0 expands its Employee Plans Compliance Resolution System (EPCRS) and recoupment limitations with immediate effect. This will make the Dept. of Labor and the IRS easier for dealerships to work with in the event there is an issue or mistake made in the 401(k) plan. 

“With a lot of the provisions in the corrections previously with the Dept. of Labor, you'd have a certain timeframe to get that done,” Baedke adds. “Depending on what the correction is, they've expanded the timeframe to allow people to catch these and get them corrected in the time that they see fit.” Baedke says the provision means there’s no pressure to hurry up and get things corrected to avoid any penalties or fees.

Finally, while employees have typically been able to decide whether they wanted to contribute to their 401(k) before tax, which has been traditional, or after tax as in a Roth 401(k), matching contributions from employers have always been required to be pre-tax. SECURE 2.0 allows employers to choose which option they prefer. 

“That sounds exciting, but this legislation caught the industry a little bit off guard,” Wentz says, “so a lot of the payroll companies and product providers aren't ready to do this.” 

Baedke adds that he and his colleagues are waiting for additional guidance. “They're trying to determine how that's going to be taxable to the participant upfront — whether it's going to be taken out of the FICA, whether it's going to be considered like a distribution on the new code on a 1099 form or if it's just going to be taxable income.” He adds that it’s an optional provision in the act.

What to Expect Throughout 2023

Wentz says that of the provisions coming up in 2023, among the most positive is an increase in the required minimum distribution (RMD) age from 72 to 73. “At the start of COVID, it had been 70.5 and got bumped to 72,” he says. “That's going to continue to increase to age 75 in the year 2033. So I think that's a really positive thing. It's not saying you can't take your money — it just allows you to move back the time frame when you have to start taking your money.”

According to Wentz, the provision applies to terminated employees or owner employees who turn 72 this year or in future years. A terminated participant turning 72 in 2023 will not have their first RMD come due until 2024. He adds that this provision requires no action from plan administrators. 

Because the goal of the SECURE Act is to encourage retirement saving, SECURE 2.0 will also offer 100% tax credits to employers establishing new plans — up to $5,000 per year for 3 years. “It basically gives $15,000 to be spread across 3 years — or $5,000 a year — for startup costs,” Wentz says. He adds that employers with 50 or fewer employees are eligible for 100% tax credit for employer contributions. The credit extends to as much as $1,000 per plan participant if the employee earns less than $100,000 per year. These tax credits are slowly phased out over a 5-year period, with 100% tax credit in the first 2 years and an annual 25% reduction in each of the subsequent 3 years.

As a way of easing the communication burden on plan administrators, SECURE 2.0 reduces the responsibility administrators have in providing disclosures to employees who exit the plan. 

“The prior state was any participant or employee that was eligible for your plan, even if they did not contribute or did not enroll in your plan, as long as they were eligible, they were required to get most of those disclosures and notices,” Baedke says. “And that's what this is eliminating.” He adds that such disclosures will only be required for employees having balances in the plan.

SECURE 2.0 has updated the long-term part-time employee eligibility rule that was established with the initial SECURE Act. It originally said that part-time employees who work at least 500 hours in 3 consecutive years beginning Jan. 1, 2021 would be eligible to participate in the 401(k) beginning Jan. 1, 2024. SECURE 2.0 changes the eligibility requirement by reducing the number of consecutive years worked to 2, effective Jan. 1, 2023. Thus, if a part-time employee works at least 500 hours in 2 consecutive years starting this year, they will become eligible to contribute on their 2-year work anniversary in 2025.

All 401(k) plans established this year or in future years will be required to have an auto-enrollment feature. This will automatically enroll new employees in the plan with an initial percentage contribution that will increase annually by 1% to a maximum of 10%. Plans established before 2023 are exempt, and so are companies with fewer than 10 employees or those that have been in existence fewer than 3 years. While 2023 is the date that is being used for the establishment of auto-enrollment, it doesn’t take effect until Jan. 1, 2025.

Changes for 2024

Employees 50 and older are permitted to make so-called “catch-up” contributions to their 401(k) plans in the interest of saving more for retirement. Baedke says that starting in 2024, such contributions will be required to be Roth — or post-tax — contributions for any participant making more than $145,000 in the previous plan year. He adds that this rule will apply to all plans — existing plans and new ones — and dealers not having a Roth provision will have to amend their plans to include it if they want to allow their employees exceeding the salary threshold to make catch-up contributions.

Cash-out limits are also increasing in SECURE 2.0 in 2024 — from $5,000 to $7,000, Wentz says — to help move former employees out of the plan and avoid unnecessary charges while also keeping the plan clean.

“If they [plan participants] leave your organization, you want to get the money out of the plan,” he says. “If somebody has $0 - $1,000, you ask them, ‘Where do they want the money to go?’ And if they don't respond, you can send them the money minus the taxes and any penalty. If somebody has $1,000 - $5,000, you can roll it into an IRA to keep the plan clean, and that $5,000 number has been increased to $7,000. So going forward, anybody that's 100% vested over $7,000 can stay in the plan.”

Withdrawals from a 401(k) plan have typically been subject to a 10% early withdrawal penalty. SECURE 2.0 has exemptions to this beginning in 2024, which include victims of domestic violence, who can withdraw funds while avoiding the 10% penalty, and others experiencing certain personal emergencies.

“They’re allowed to be paid back, and that's a good thing,” Baedke says. “So if somebody needs the money now, they can pay that back, whereas say you take a hardship distribution that is not paid back, and you have the early withdrawal penalty on that. And a couple of these things, like the personal emergency, do have limits set on the amounts you can take.” 

Domestic abuse victims will have access to the lesser of $10,000 or 50% of their vested account balance for up to a year after the incident of domestic abuse.

For personal emergencies, participants may take in-service withdrawals up to either $1,000 or their vested account balance, whichever is the lesser amount. They have 3 years to repay these funds and are limited to one distribution per calendar year. Participants cannot make any additional emergency withdrawals during that time, however, unless they have put the amount they withdrew back into the account.

2025 & Beyond

There are aspects of SECURE 2.0 that extend as far as 2033. These include an increase in the catch-up limit for participants ages 60 - 63 and a requirement to send out paper benefits statements. To learn more and for additional details about the near-term effects of the act, watch the complete Tax Favored Benefits webinar, “SECURE Act 2.0: What You Need to Know.”

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