In December 2022, Congress passed a giant omnibus budget bill that included the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (“SECURE 2.0”). Secure 2.0 contains numerous provisions related to individual and employer-sponsored retirement plans. Let’s examine a few of the key provisions.
Age Increased for Required Minimum Distributions
The age used to determine required minimum distributions increases in two stages – from 72 to 73 for those who turn age 72 after 2022, and to age 75 for those who turn 74 in 2032 or later.
Catch-up Contributions Increased
Starting in 2025, the Act increases the current elective deferral catch-up contribution limit for employees between 60 and 63 years old. The amount increases from $7,500 in 2023 ($3,500 for SIMPLE plans) to the greater of $10,000 ($5,000 for SIMPLE plans), or 50% more than the regular catch-up amount in 2024 (2025 for SIMPLE plans). The dollar amounts are inflation-indexed after 2025.
Return of Excess Contributions
The Act specifies that earnings attributable to excess IRA contributions that are returned by the taxpayer’s tax return due date (including extensions) are exempt from the 10% early withdrawal tax. The taxpayer must not claim a deduction for the distributed excess contribution.
Automatic Enrollment for Employer Plans
For plan years beginning after 2024, the Act provides that an employer-sponsored qualified plan that permits salary deferrals must include an automatic contribution arrangement that satisfies certain new requirements. Although participants may elect out, automatic enrollment will certainly increase the number of participants contributing to employer-sponsored plans. Some plans or small employers may be exempt from the automatic enrollment provisions, including plans established before December 29, 2022.
Improved Coverage for Part-time Employees
The Act modifies the rules that apply to long-term part-time employees under a 401(k) or 403(b) plan to reduce the service requirement for those employees from three years to two consecutive years, for employees who have worked for the employer at least 500 hours per year and have met the minimum age 21 requirement by the end of the two-year period. This change is effective for plan years beginning after 2024.
Changes for Conservation Easements
Some provisions included in Secure 2.0 were not related to retirement plans, including this important change to conservation easements.
The Act disallows a charitable deduction for an otherwise-qualified conservation easement contribution made by a partnership, S corporation, or other pass-through entity if the amount contributed exceeds 2.5 times the sum of each partner/member’s basis in the contributing entity. Exceptions apply where the contribution meets (1) a three-year holding period test, (2) substantially all of the contributing entity is owned by members of a family, or (3) the contribution relates to a certified historic structure (for which there is a new reporting requirement).
Other provisions of Secure 2.0 include:
- Tax and penalty-free rollovers from 529 plans to Roth IRAs up to $35,000, if certain conditions are met
- A broader range of circumstances in which withdrawals can be made without the 10% early withdrawal penalty
- Reduced penalties for failure to take required minimum distributions
- Change in the required distribution requirements for surviving spouse beneficiaries in qualified employer plans
- Matching contributions to qualified retirement plans based on the amount of student loan payments made by the employee
- Tax credits for small businesses to offset the costs of establishing a qualified plan, and “starter 401(k)” plans for small employers
- Some employer matching or nonelective contributions may be designated as Roth contributions
Please don’t hesitate to call your Dent Moses advisor for more information and assistance.