With the new SECURE 2.0 Act of 2022, there are great benefits for both participants and non-participants alike to consider in the coming years related to retirement plans. The SECURE 2.0 Act expands on the original SECURE Act of 2019 and includes additional benefits for part-time employees, expanding the employer match, changes to required minimum distributions, and much more. Here are some items that individuals should consider related to defined contribution retirement plans, whether these plans are being utilized or not.
The SECURE 2.0 Act changes the eligibility requirements under an employer-sponsored defined contribution plan so that it is easier for part-time employees to participate in these types of plans. The original SECURE Act of 2019 allowed for eligibility to be limited to part-time employees who were age 21 and had either 1,000 hours or more worked in a 12-month period or three consecutive years of service with at least 500 hours worked in each year. The act reduces the three-year requirement to a two-year requirement with at least 500 hours worked in each of the plan years beginning January 1, 2025.
Employer Match Changes
Employees choosing not to participate in an employer-sponsored defined contribution plan due to paying down their student loans could start benefitting from an employer match contribution beginning January 1, 2024. The new SECURE 2.0 Act allows employers to calculate a match for participants who are eligible to participate in an employer-sponsored plan but are not contributing due to student loan repayment. The match would be based upon the amount of student loan payments made during the year, and for the eligible participant to qualify, they would be required to provide details on the student loan and certify the information to the employer.
The SECURE 2.0 Act also allows employers to deposit employer match and/or nonelective contributions to employees’ ROTH accounts if the plan allows for ROTH contributions by participants. This provision of the new act is effective immediately. However, employers and plan administrators will need time to set up this change before it can occur within plans. If an employee does choose to have their match put into a designated ROTH account, the match amount will be included in the employee’s wages in the year it is contributed, but it will not be subject to any vesting schedules within the plan.
Required Minimum Distribution Changes
Under the new SECURE 2.0 Act, not only is the required minimum distribution (RMD) age increasing again over the next ten years to help participants delay distribution from their retirement accounts but there are other changes that will benefit older participants as well. Beginning January 1, 2024, ROTH accounts in employer-sponsored retirement plans will be exempt from the RMD requirements just like ROTH IRA accounts are currently.
The act also reduces the penalty from the current 50 percent to 25 percent when an individual fails to take an RMD from a qualified retirement plan. In addition, if a participant fails to take an RMD from an IRA account but corrects this failure timely, the penalty is reduced from 25 percent to 10 percent. These reductions in penalties are effective immediately beginning after the enactment of the new SECURE 2.0 Act. Another new provision effective immediately is related to plan annuity payments that exceed a participant’s RDM amount. Any excess annuity payment can be applied to the following year’s required distribution to avoid any penalties.
529 Plan Transfers
Beginning in 2024, some individuals may be able to move 529 plan funds directly to a ROTH IRA if certain requirements are met.
In order to take advantage of this new transfer ability, the following conditions must be meet:
- The ROTH IRA account must be in the name of the beneficiary of the 529 plan
- The 529 plan must have been maintained for 15 years or longer
- The annual limit for how much can be moved from a 529 plan to a ROTH IRA is the IRA contribution limit for the year and funds cannot be doubled with outside contributions made
- Any contributions to the 529 plan within the last 5 years are not eligible for the transfer
- The maximum amount that can be moved from a 529 plan to a ROTH IRA during an individual’s lifetime is $35,000.
One major advantage that the SECURE 2.0 Act allows for related to transfers from a 529 plan to a ROTH IRA account is that the transfers will not be subject to the same income limitations that are in place when an individual looks at making regular ROTH IRA contributions.
There are several other items for individuals to consider related to the new SECURE 2.0 Act that are major advantages to those holding retirement accounts. One advantage is that surviving spouse beneficiaries can now elect to be treated as if they are a deceased employee for purposes of the required minimum distribution rules. This means that the surviving spouse can both delay the RMD, and have it calculated using the Uniform Lifetime Table rather than the Single Lifetime Table that currently applies to beneficiaries.
Another advantage relates to qualified charitable distributions (QCD) now being indexed for inflation beginning in 2024. In addition, effective for 2026, the new SECURE 2.0 Act expands access to ABLE accounts by allowing them to be established for individuals who become disabled prior to age 46 instead of prior to age 25. This expansion will allow for many disabled individuals to have access to savings that they were barred from previously. Finally, within two years of the SECURE 2.0 Act being enacted, a national online searchable lost and found database is to be created. This database will allow employers to locate “lost” plan participants and plan individuals to locate their retirement funds.
If you have any questions, reach out to The Whitlock Co. for a consultation.