After months of discussions, Congress passed the long-awaited SECURE 2.0 Act of 2022, with President Joe Biden signing it into law in late December. 

SECURE 2.0 combines many elements from three separate retirement bills. Here are summaries of key provisions affecting larger, institutional retirement plans, along with our view of what they might mean and the years in which they will become effective.

Provisions effective 2023

Relaxed RMD rules (2023)

The age at which required minimum distributions (RMD) must begin has increased from 72 to 73 and will increase to 75 in 2033. Also, the penalty for not taking an RMD from a qualified plan or IRA has been lowered from 50% of the required amount not taken to 25%. If an untaken RMD from a qualified plan or IRA is corrected in a timely manner, the excise tax has been reduced from 25% to 10%.

Our view: These straightforward changes aren’t expected to be problematic, similar to the RMD age change in 2020.

Roth option available for employer contributions (2023)

Previously available only as pretax, employers now have the option to allow employees to decide whether to take employer matching and nonelective contributions on a Roth after-tax or pretax basis. The employer may deduct Roth contributions, but employees take Roth contributions as income, and contributions and earnings would be subject to normal Roth rules thereafter. Roth contributions must be fully vested.

Our view: It may take some time for recordkeepers and payroll providers to accommodate this option. Whether and how withholding will be applied to employer Roth contributions is unclear. Employers may need to work out how to satisfy any required withholding from other compensation paid to the employee or through other means. While Roth treatment applies to participants who are fully vested, it’s not entirely clear whether it could be applied to the vested portion of employer contributions subject to a vesting schedule. IRS guidance on this option is needed and expected.

Provisions effective 2024

Emergency Roth savings accounts (2024)

Employers have the option to add an emergency savings account to their plan to provide non-highly compensated employees (NHCEs) easy access to emergency funds. Automatic enrollment of up to 3% of salary can be established, and the employee contributions, which are Roth after-tax, are subject to matching. Once the account balance reaches $2,500 (indexed for inflation) or a lower amount determined by the employer, no further contributions are allowed until the balance falls below the limit. Assets must be invested in cash, an interest-bearing deposit account or an investment product designed to preserve principal, such as a stable value investment. Employers must follow specified notice and disclosure requirements. Employees are allowed to withdraw up to the full account balance at least once per calendar month. The first four withdrawals in the plan year cannot be subject to fees. At separation from service, employees may take their emergency savings accounts as cash or roll them into the plan’s designated Roth account (if available) or a Roth IRA.

Our view: Employers may elect to automatically enroll non-highly compensated employees (NHCEs) into emergency savings accounts. Since these contributions must be made on a Roth basis, employers may want to consider shifting their automatic enrollment arrangements to Roth more generally. Employer matching contributions must be made on emergency savings contributions to the same extent as regular elective deferrals. This may present an opportunity for abuse where employees contribute only to receive the match and then quickly withdraw their contributions. The legislation directs the Treasury Department to issue guidance with respect to rules for preventing such abuse.

Emergency withdrawals (2024)

Eligible retirement plans may permit participants to take one distribution up to $1,000 each calendar year that is self-certified by the participant for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” Such withdrawals are not subject to the federal 10% penalty for early withdrawals. Participants have the option to repay emergency withdrawals within three years. Once an emergency withdrawal is made, another cannot be made within three years unless the amount withdrawn is fully repaid or the total contributions to the plan or IRA during the three-year repayment period exceed the amount of the original emergency distribution.

Our view: Intended to allow participants greater access to their savings, given the limited dollar amount, it remains to be seen how impactful this provision is.

Student loan payment match (plan years beginning after 2023)

Employers with 401(k), 403(b) or SIMPLE plans have the option to make matching contributions on workers’ qualified student loan payments. Matching contributions are also allowed with governmental 457(b) plans.

Our view: Informal IRS guidance previously permitted student loan matching contributions but did not solve potential nondiscrimination testing issues. SECURE 2.0, however, permits separate testing of participants receiving student loan matching contributions.

Automatic IRA portability (2024) 

Certain small retirement plan account balances for terminated employees can be automatically rolled into a default IRA. Employer plans will have the option of automatically transferring a participant’s default IRA from a previous employer into the participant’s current employer plan unless directed otherwise by the participant.

Our view: A growing number of recordkeepers are sharing data to support this program and offering plan sponsors access to this service.

Provisions effective 2025 and later

Required automatic enrollment and escalation (plan years beginning after 2024)

Unless employees opt out, new 401(k) and 403(b) plans must automatically enroll participants in the plan with a beginning salary deferral of 3%–10%. Deferrals must increase by 1% per year up to 10%–15%. Exemptions apply, including small businesses (10 or fewer employees), new businesses (less than 3 years old), and church and governmental plans. Plans existing before December 30, 2022, are not subject to this provision.

Our view: Although this change may not impact existing plans, questions may arise with mergers and acquisitions.

Wider plan eligibility for part-time workers (2025)

The number of consecutive years in which employees need at least 500 hours of service to become plan eligible was lowered from three years to two years for 401(k) and 403(b) plans. Service before 2021 is disregarded when determining vesting.

Our view: This provision doesn’t supersede the first SECURE Act’s eligibility rules, so workers may qualify for plan eligibility under the three-year rule (from 2021 on) or two-year rule (from 2023 on).

Increased catch-up contributions (taxable years beginning after 2024)

The catch-up contribution maximum for employees age 50+ is $7,500 for 2023 ($3,500 for SIMPLE plans) and adjusted for inflation annually. Beginning in 2025, employees age 60–63 will have a higher catch-up limit — 50% more than the regular catch-up limit or $10,000 more, whichever is greater.

Our view: Keep in mind that employees age 64 and over don’t qualify for the higher catch-up limit, so participants may have to decrease their contributions when they reach age 64.

Retirement savings lost and found (2025)

To help individuals find information about previous employers to claim earned benefits, a searchable retirement savings database will be created by the Department of Labor (DOL).

Our view: This is broader than helping missing participants locate their former plans. While employers will be required to report some additional information to the DOL in connection with the database, it will help overcome problems created by mergers and name changes and help participants locate small-sum cash-out IRAs. Under current law, if an employer is unable to locate a terminated employee who has a small retirement account balance (or if that employee is unresponsive), the employer can automatically “cash out” the account and place the sum in an IRA. This database should help terminated employees locate those accounts.

Required Roth treatment for catch-up contributions (taxable years beginning after 2025)

Catch-up contributions to qualified retirement plans for higher earners are required to be Roth after-tax contributions, even if regular contributions are pretax. Participants with compensation below $145,000 (to be adjusted for inflation) are exempt and can elect pretax or Roth catch-up contributions (if available).
 

Our view: It remains to be seen whether this change undermines the utility of reclassifying contributions as catch-up contributions in order to satisfy nondiscrimination testing. (These tests, prescribed by the IRS, are designed to verify that deferred wages and employer matching contributions do not discriminate in favor of the plan’s highly compensated employees.) Notably, the legislation inadvertently removed the existing law provision that permits catch-up contributions. This appears to be a drafting error that is primed for a technical correction or other IRS fix. 

Saver’s tax credit becomes a government match (for taxable years beginning after 2026)

The saver’s tax credit (up to $1,000 per individual) for lower income workers changes from a credit paid in cash as part of a tax refund to a federal matching contribution deposited into a retirement plan account or IRA. Also, the credit rate changes from a tiered range of 10%–50% of retirement plan and IRA contributions to an across-the-board 50%.

Our view: Although an attractive benefit for employers to promote to employees, many logistical questions remain unanswered.

DOL to allow blended benchmarks for asset allocation funds (2025)

The Department of Labor’s (DOL) participant disclosure regulation requires a comparison of investment returns to an appropriate broad-based securities market index, even for investments that include a mix of asset classes (asset allocation funds, such as target date funds). To allow better comparisons, asset allocation funds can be benchmarked against an appropriate blend of broad-based indexes.

Our view: This change overrides the DOL’s position prohibiting the use of blended benchmarks. However, because this provision only affects participant disclosure, changes may not be impactful.

The bottom line

Saving for retirement consistently ranks among Americans’ top financial worries. The SECURE 2.0 Act’s provisions provide much-needed opportunities for workers to increase their retirement savings while giving retirees more flexibility to preserve their assets and create income for later in life.