Last week we went over the provisions of the SECURE Act 2.0 that affected employers, both small and large. This week, we’ll dive into the provisions that affect plan participants, as well as student loans, savings and emergencies.
Provisions For Plan Participants
New RMD Start Date
SECURE 2.0 pushes back the beginning date for required minimum distributions from qualified plans. Individuals turning age 72 during 2023 or later will start their RMD at age 73. For those reaching age 74 after December 31, 2023, their start date is age 75. For those able to defer their RMD to these later birthdays, retirement savings may continue to compound earnings tax deferred or tax exempt in the case of inherited Roth IRAs.
Individuals over age 50 can contribute a salary reduction catch-up contribution to an employer plan. This contribution is currently limited to $6,500 annually. For tax years beginning after 2024, employees who are 60-63 years old can take advantage of a higher catch-up contribution of $10,000. SECURE 2.0 provisions also index the IRA catch-up contribution for individuals over age 50. The current catch-up amount is $1,000, but this amount will increase for cost-of-living adjustments in tax years beginning after 2023.
SECURE 2.0 requires that catch-up contributions are designated as Roth contributions for any plan participant whose wages exceed $145,000, effective for tax years after 2023. In addition, employers can make matching and non-elective contributions to designated Roth accounts.
Annuity Investment Option
Annuity contracts will be more readily available within employer plans. Plan participants in account balance plans may want to use a portion of retirement plan savings to provide lifetime income. Any annuity provides a lifetime income stream, as is offered by law in a defined benefit pension plan. Prior to SECURE 2.0, employer plans were generally constrained in allowing participants to purchase annuities in their accounts due to the required minimum distribution rules. SECURE 2.0 facilitates an employer’s ability to include annuity options in a plan. The new law directs the IRS to modify its regulations within 18 months to allow for more relaxed rules around the payment of premiums for an annuity, and how the annuity’s annual payment is considered in the determination of the participant’s RMD.
Limiting IRA Penalties
The law makes clear, with no inference language for prior years, than an IRA account which loses exempt status due to a prohibited transaction does not result in a loss of exempt status for all IRAs owned by that individual. This provision should encourage those with alternative investments in IRA accounts (which could result in prohibited transactions) to use separate accounts for each investment.
RMD Penalty Relief
If required minimum distributions are not taken, the excise tax penalty is reduced to 25% for taxable years beginning in 2023. The penalty is further reduced to 10% if corrections is made within two years after the end of the taxable year in which the distribution was missed.
College Loans and Savings
Student Loan Repayment
A few years ago, the IRS approved a plan that allowed employer contributions to be made to a 401(k) plan for employees who were repaying their student loans. Beginning in 2024 with SECURE 2.0, an employee’s student loan debt repayment can be treated as the employee’s salary deferral to 401(k) or 403(b) plan. This is an option that an employer can add to their retirement savings plan. The advantage of this provision is to increase retirement savings for employees by allowing employer matching contributions to be made for compensation amounts employees use to pay down debt, rather than defer into the employer’s retirement savings plan.
Convert College Savings to Roth IRA.
Many individuals contribute to an IRC Section 529 plan to save for an individual’s education costs. Sometimes, these accounts hold funds that are no longer needed for education. SECURE 2.0 creates a new option for continuing to grow these funds in a tax-exempt way. In 2024, owners of certain 529 plan accounts may transfer these savings into a Roth IRA. This option applies to a 529 plan account that has been in effect for at least 15 years, and the amount transferred does not exceed the total of contributions made to the 529 plan during the most recent five years. Finally, the amount transferred during a year is limited to the annual amount allowed as a Roth IRA contribution, and all transfers are limited to a maximum of $35,000.
Emergency Savings and Distributions
The new law permits employers to add provisions to their plans to help non-highly compensated employees save for emergencies. Employee contributions to these emergency savings accounts are not part of the employee’s regular retirement savings. These emergency savings funds are separately accounted for and amounts are withdrawn at the discretion of the plan participant. The employee’s emergency savings account balance is generally limited to no more than $2,500.
SECURE 2.0 also allows plan participants to withdraw up to $1,000 annually for meeting unforeseeable or immediate family needs relating to personal or family emergency expenses. The distributions are not subject to the 10% penalty for early withdrawal for those that have not reached age 59 ½. Only one distribution can be made per year. An employee can repay the amount to the plan within three years.
Employer plans can also add similar withdrawal provisions that are exempt from the 10% penalty for plan participants who are terminally ill and for those who are victims of domestic abuse. These provisions in SECURE 2.0 have various effective dates.
Effective for disasters after December 27, 2020, SECURE 2.0 permanently exempts plan distributions from the 10% penalty for early withdrawal when meeting the following conditions:
The individual withdraws no more than $22,000
The individual’s principle place of residence is in a federally declared disaster area
The individual sustains an economic loss by reason of the disaster
A qualifying disaster-related distributions can be included in income over three years or the individual can repay the distribution amount to the plan within three years. Using the above criteria, an individual can borrow from the qualified plan up to a maximum of $100,000 or 100% of the vested account balance. Loan repayment periods for these individuals for existing loans are extended for one year.
To read the full text regarding this law, please visit https://www.congress.gov/bill/117th-congress/house-bill/2954/text.