SECURE Act 2.0: Changes to retirement planning (2024)

The SECURE (Setting Every Community Up for Retirement Enhancement) Act was first signed into law on December 20, 2019. The original iteration of the bill made several much-needed adjustments to the country’s retirement system. However, it wasn’t a comprehensive solution to the retirement crisis in America.

During 2022, both the House and Senate considered various pieces of retirement plan legislation, culminating in SECURE 2.0 being incorporated into the 2023 Consolidated Appropriations Act, also known as the Omnibus Bill.

On December 29, 2022 President Joe Biden signed SECURE Act 2.0 into law. SECURE 2.0 is a huge step forward in addressing the retirement savings gap and adds more than 90 new retirement plan provisions. Broadly speaking, the bill introduces several significant changes for small businesses, and those saving for retirement by:

• Promoting saving earlier for retirement, as well as increasing some limits

• Boosting incentives for small businesses to offer retirement plans

• Offering those age 60+ more flexibility for saving as they approach retirement

Below, we review key details of the SECURE Act, including original provisions from 2019 and updates made in 2022. 

Expanded SECURE Act small business tax incentives

The original SECURE Act created significant tax benefits for small businesses. SECURE 2.0 (H.R. 2954) expands on several of these incentives.

• Doubles tax credits for new plans: For small businesses with up to 50 employees, SECURE Act 2.0 increases the existing tax credit to 100% of plan start-up costs (up from 50%), capped annually at $5,000 per employer (which remains unchanged) for each of the first three years. That could mean a total of $15,000. Eligible businesses with 51 to 100 employees are still subject to original SECURE Act tax credits equal to 50% of administrative costs, capped annually at $5,000 per employer for three years.

• Expands eligibility for the start-up tax credit: Legislation also extends start-up tax credits to employers based on the year employers join existing multiple employer plans, rather than only if they join new plans.

• Adds new credits for employer contributions: Small businesses with up to 50 employees will receive a new tax credit based on a percentage of employer contributions, up to $1,000 per employee for employees making less than $100,000 in the prior year (excluding employer contributions as elective deferrals under Code Sec. 402(g)(3) or to a defined benefit plan under Code Sec. 414(j)). Eligible employers with between 51 and 100 employees qualify for a credit phase-in equal to:

  • A percentage of 2% points for each employee for the preceding taxable year in excess of 50 employees.

  • The amount determined above, multiplied by:

    • 100% in the first and second years

    • 75% in the third year

    • 50% in the fourth year

    • 25% in the fifth year

• Maintains tax credit for using auto-enrollment: The tax credit of $500 per year for the first three years of electing auto-enrollment is still available.

Auto-enroll mandatory for new plans starting in 2025 

One of the most significant changes, SECURE Act 2.0 requires auto-enroll in new plans started after 12/29/22, beginning with the 2025 plan year. This means that any plan set up with an effective date after 12/29/2022 must add auto-enroll no later than 1/1/2025 (for calendar year plans). While plans can delay adding auto-enroll for now, they'll be required to amend their plans when the time comes.

Auto-enroll is a powerful tool that can help boost participation rates and help employees bolster their financial futures.  While employees may still opt out of participation, research demonstrates this is one of the easiest methods to jumpstart retirement savings and make saving a habit.

Automatic contributions must be at least 3% and may be up to 10% of employee compensation. Contribution rates must increase by 1% each year until at least 10% is reached, but not more than 15%. Existing plans aren’t required to add auto-enrollment—current 401(k) and 403(b) plans will be grandfathered under new proposals. And the following are exempt from both auto-enrollment and auto-escalation:

• Small businesses with fewer than 10 employees

• New businesses less than 3 years old

• Churches and governments

Employers may offer small, immediate financial incentives to save for retirement

Already, an employer is the number one reason people start saving for retirement, according to Human Interest research from 2020—and now that may be even more true. With SECURE 2.0 legislation, employers can offer small, immediate incentives, like low-amount gift cards, to encourage employees to contribute to employer-sponsored retirement plans.

Increased access for part-time workers  

SECURE 2.0 reduces requirements for part-time workers by one year. The SECURE Act enabled “long-term, part-time workers” (LTPT) to participate in 401(k) plans. Under that provision, employers with a 401(k) plan were required to offer the plan to employees who completed either one year of employment (not to exceed 1,000 hours), or three consecutive years of employment where they’ve worked at least 500 hours. 

SECURE 2.0 amended these rules to further reduce the eligibility period for LTPT employees. New provisions reduce the three-year rule to two years. Starting in 2025, 401(k) plans and ERISA 403(b) plans must allow employees to participate in the plan if an employee works at least 500 hours in two consecutive 12-month periods.

Learn more about 401(k) benefits for part-time employees and interns including the expanded eligibility rules.

Increased savings flexibility for those 60 and over

For those nearing retirement, SECURE 2.0 may help increase how much individuals can save. 

Expanded catch-up contribution ages: SECURE 2.0 expands catch-up contributions to include participants aged 60, 61, 62, or 63 (but not older than 64) by the end of the tax year. The increased catch up contribution for older participants is effective for the 2025 plan year, and increases the savings amount to the greater of $10,000 or 150% of the catch up amount in effect for 2024, as indexed.

IRA catch-up contribution indexed to inflation: The IRA catch-up contribution limit for those aged 50 and over (currently $1,000) will be indexed to inflation starting in 2023. 

Increased mandatory RMD age from 72 to 73 and 75: Proposed legislation would bump the required minimum distribution (RMD) age to 73 as of January 1, 2023 and then to 75 as of January 1, 2033 (from age 72, which took effect with the SECURE Act), allowing individuals to keep saving longer. SECURE 2.0 also reduces the tax penalty for failing to take RMDs from 50% to 25%. And if failures to take an RMD are corrected promptly, excise taxes are reduced from 25% to 10%.

Reduced penalties for withdrawing money due to emergency  

Currently, participants that wish to take money from their retirement plan likely face a 10% penalty on early withdrawals before normal retirement age. SECURE 2.0 changes that in some cases. 

Starting in 2024, participants may take one penalty-free withdrawal of up to $1,000 per year for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” Participants may repay this withdrawal within three years. Only one withdrawal per three-year repayment period is permitted if the first withdrawal has not been repaid.

SECURE Act 2.0 also changes hardship withdrawal rules for 403(b) plans to be the same as 401(k) plans. In addition to elective deferrals, an employee may choose qualified nonelective contributions, qualified matching contributions, and earnings on any of these contributions (including elective deferrals). It also expands hardship withdrawals to include penalty-free withdrawals from retirement plans in cases of domestic abuse.

New programs to help employees pay down student loans

SECURE 2.0 will help formalize a way for employers to help individuals pay down their student loans. Starting in January 2024, employers may design a plan to allow student loan payments to be treated as elective deferrals for purposes of matching contributions. Instead of contributing to a 401(k), 403(b), or SIMPLE IRA plan, employees can make contributions to pay off student loans. 

Employees will be eligible to receive an employer match (and will remain on the same vesting schedule as if they were contributing to a retirement plan) on eligible student loan repayments.

Updates to Roth catch-up contributions

In addition to expanding the age for catch-up contributions, SECURE 2.0 introduces additional changes to catch-up contributions. Effective January 1, 2024, catch-up contributions for individuals with FICA compensation in excess of $145,000 will be required to be made as a Roth contribution. If a plan allows for catch-up contributions, individuals age 50 and over can make additional contributions to their plan up to the applicable IRS limits.

On August 25, 2023, the IRS released Notice 2023-62 announcing an administrative transition period until January 1, 2026 for implementing this requirement. Specifically, the Notice provided that until taxable years beginning after December 31, 2025, catch-up contributions will be treated as satisfying the requirements outlined in SECURE 2.0, even if the catch-up contributions are not designated as Roth contributions. Also, a plan will not violate the requirements of SECURE 2.0 if it provides for catch-up contributions, but does not permit any contributions to be designated as Roth contributions.

With this guidance, Human Interest will prepare for the implementation of this provision to take effect on January 1, 2026. 

What else is in SECURE 2.0?

With 90+ provisions in SECURE Act 2.0, there’s a lot to parse through. Below are some highlights for employers and employees.

Notable changes for employees

There are several changes related to annuities that help individuals use this strategy to generate lifelong income. New regulations also allow qualified plans to add a provision for employees to designate employer contributions as Roth. However, these contributions must be immediately 100% vested and taxable to the employee upon deposit into the plan.

A welcome change required by the SECURE Act 2.0 would create an online database of lost retirement accounts. The deadline for the database is no later than two years after enactment of SECURE 2.0. This database will make it easier for employees to find lost retirement accounts.

New regulations would require that the Treasury raise awareness of the “Saver’s Credit.”  In addition to creating awareness, the Saver’s Credit has been updated and simplified, so only one tier exists. 50% of an employee’s contribution to a qualified retirement plan is considered and begins phase out at an adjusted gross income (AGI) of $41,000 for joint filers. The credit is treated as a pre-tax contribution to the participant's IRA or qualified plan. Future guidance is anticipated from the IRS on this before it becomes effective in the 2027 tax year. 

It modernizes family attribution rules. Current law provides that a child is attributed ownership for certain reasons under IRC Section 318 to create a controlled group when the parents own two separate, unrelated business entities. Secure 2.0 removes this antiquated provision and should assist small, family-run businesses with retirement planning and protect family members from being negatively impacted by a spouse’s unrelated business.

It’s working to simplify notifications about retirement plans. Several provisions in Secure 2.0 call for reviewing and updating standard notices for better participant understanding, including the Special Tax Notice provided with distribution forms, fee disclosures, and several annual required notices. It also calls for an annual paper statement for 401(k) plans unless certain requirements are met. Although these updates aren’t scheduled to become effective for a couple years (to allow time for review and update), it’s a promising lead towards standardization and simplification of retirement notices.

Notable changes for employers

SECURE 2.0 extends the time for employers to make beneficial discretionary retirement plan amendments. Employers can now retroactively amend a pension, profit-sharing, or stock bonus to increase non-elective benefits accrued under the plan in the preceding plan year. This would enable employers with existing 401(k) plans to make plans more favorable to rank-and-file workers after the end of a plan year and maximize an employer’s tax benefit.

Effective 1/1/24, SIMPLE plan sponsors can convert to a safe harbor plan mid-year. In years prior, SIMPLE plans could not be terminated until year-end. 

Currently, mandatory distributions, if noted in plans, are capped at a vested balance of $5,000. Secure 2.0 understands this amount has not been adjusted for inflation, and increases the maximum to $7,000. This allows employers to remove more terminated participants from their plan and assist in keeping the number of account balances low, which can assist in avoiding a plan audit.

It allows sole proprietors to make retroactive first-year elective deferrals if they sponsor a Solo(k) plan.

Finally, SECURE 2.0 would change top-heavy testing for plans with “excludable employees”. These new provisions would allow employers to perform top-heavy testing separately on excludable and non-excludable employees. Due to upcoming “long-term, part-time” employee provisions, this could help small and medium businesses that are required to fund an unexpected top heavy benefit each year.

SECURE Act 2.0 and the future of retirement savings

Human Interest supports SECURE Act 2.0. We consider it an instrument that could help reduce the retirement savings gap. However, the bill alone won’t close the retirement savings gap. 

Many SECURE Act 2.0 provisions are designed to improve 401(k) plans. However, the legislation doesn’t guarantee access for those without a plan. Expanding tax credits for starting a plan may help, but may not have the same impacts as a nationwide mandate. Nearly ten states have active state-level mandates—and many more have pending legislation—but we believe a federal mandate could help to close America’s retirement savings gap. 

Additionally, we believe that adding more plan design features may help improve the savings gap. For example, adding a default around eligibility could expand access to millions. 2.74 million employees started new jobs in the first half of 2022, and many of those who work for companies without auto-enrollment (let alone access to a way to save for retirement through work). While SECURE Act 2.0 eventually requires auto-enrollment, increasing default contribution rates (from 3% to 6% or more) could help employees save more.

At Human Interest, we believe in providing all small and medium-sized businesses with access to retirement benefit plans. SECURE Act 2.0 helps advance this mission—but we believe there’s more work to be done.

Interested in learning more about starting an affordable, accessible retirement plan? Contact us to learn about our small business 401(k) and 403(b) plans.