What is underway as one of the most noteworthy changes to retirement savings plans in years, the SECURE Act (Setting Every Community Up for Retirement Enhancement Act 2.0), is now law. The SECURE Act 2.0 is one of the most significant changes to retirement savings plans since Congress allowed for the automatic enrollment of employees and the addition of Target Date funds to retirement plans in 2006.
The legislation provides changes that aim to help strengthen the retirement system and financial retirement readiness for Americans. Here’s how the Secure Act 2.0 will change the way company retirement plans administer:
- Offer more investment options to plan participants
- Provide access to financial advisors
- Change the retirement plan’s required minimum distribution (RMD) to age 73 in 2023 and 75 in 2033.
- In 2024, RMDs will no longer be required from Roth IRA accounts in employer retirement plans.
- Mandated employee retirement plan participation for both full-time and part-time employees.
- Automatic enrollment and automatic plan portability. The legislation requires businesses adopting new 401(k) and 403(b) plans to automatically enroll eligible employees, starting at a contribution rate of at least 3%, starting in 2025.
What the SECURE Act 2.0 means for businesses
Small businesses previously left out of offering retirement plans due to the high cost of plan administration can now be grouped with other small businesses to allow for cost-sharing.
Most U.S. employer retirement plans administer by third-party providers, not the investment company or the financial advisor, and are a direct cost to the employer. Employer’s pay for each employee participating in the plan, yearly upfront costs for having a retirement plan, and the employer’s matching contribution.
The SECURE Act aims to help Americans save more for retirement by mandating that advisory services and financial education are part of all company retirement plans.
What are the main features of the SECURE Act?
- Increasing the RMD (Required Minimum Distribution) age to 73 in 2023 and 75 in 2033.
- Section 529 education savings account owners will be allowed to use retirement accounts to cover the costs of homeschooling, qualified student loan repayments of up to $10,000 (siblings included), private schools, and apprenticeships for the account beneficiary. The catch is a 529 plan must be in place for the retirement account to be used for education with no tax or early withdrawal penalty.
- New 10-Year Rule– Retirement accounts must distribute all benefits within ten years after a retirement plan participant dies or an IRA owner dies, except when the beneficiary is a spouse, disabled or chronically ill, a child who hasn’t reached the age of majority, or a beneficiary not more than ten years younger than the deceased owner.
- Employees can make contributions until their RMD age to their retirement accounts. The Act would help workers who plan to continue to work into their 70s save additional money for retirement.
- 401(k) plans will offer annuities as an investment choice to help workers help guarantee a portion of their retirement savings from market risk. Annuities are backed by the insurance company’s claims-paying ability and are an insurance product.
- Matching Roth IRA accounts. Employers can provide employees the option of receiving vested matching contributions to Roth accounts. Previously, matching in employer-sponsored plans was made on a pre-tax basis. Contributions to a Roth retirement plan are made after tax, after which earnings can grow tax-free. Unlike Roth IRAs, RMDs from an employer-sponsored plan are required for Roth accounts until the tax year 2024.
- Parents would be allowed to withdraw $5000 penalty-free from a 401(k) to pay for expenses related to the birth of a child or a new child through adoption.
- Emergency savings. Defined contribution retirement plans could add an emergency savings account that is a designated Roth account eligible to accept participant contributions for non-highly compensated employees starting in 2024. Contributions would be limited to $2,500 annually (or lower, as set by the employer), and the first four withdrawals in a year would be tax and penalty-free.
- Part-time workers working 500 or more hours per year for at least three consecutive years would be allowed to participate in their company’s retirement plan.
Sources: Fidelity, Kiplinger, Investopedia.
The SECURE Act aims to help Americans save more for retirement through their employer’s savings plan. Whether you have 2 or 200 employees, leverage our expertise at Aspen HR to design a customized retirement benefits program for you and your employees.
