SECURE ACT 1.0 AND 2.0 – CHANGES TO IMPROVE RETIREMENT SAVINGS PLANS

HR / Workplace

The Setting Every Community Up for Retirement Enhancement Act, also known as the SECURE Act, represents a significant legislative effort to improve retirement savings and security for Americans. The SECURE Act 1.0 and 2.0 introduced various provisions to make retirement planning more accessible and practical.  Below is an overview of both acts and their key features:

SECURE Act 1.0

The SECURE Act 1.0 was signed into law on December 20, 2019, and took effect on January 1, 2020. It marked the most substantial retirement reform since the Pension Protection Act of 2006. Key provisions of the SECURE Act 1.0 include:

  • Raising the Required Minimum Distribution (RMD) Age: The age at which an individual must start taking RMDs from their retirement accounts increased from 70½ to 72.
  • Eliminating the Age Limit for IRA Contributions: Previously, individuals were not allowed to contribute to their IRAs after reaching age 70½. The SECURE 1.0 Act removed this age limit, allowing contributions as long as the individual has earned income.
  • 10-Year Distribution Rule for Inherited IRAs: Beneficiaries of inherited IRAs must now withdraw the entire balance within 10 years, replacing the previous “stretch IRA” provisions.
  • Expansion of 529 Plans: The act allowed 529 education savings plans for student loan repayments and certain apprenticeship programs.
  • Small Business Retirement Plans: The SECURE 1.0 Act made it easier for small businesses to establish retirement plans by providing tax credits and allowing multiple-employer plans (MEPs).

SECURE Act 2.0

The SECURE Act 2.0 was signed into law on December 29, 2022, as part of the Consolidated Appropriations Act of 2023. This act introduced additional provisions to SECURE 1.0 to further enhance retirement savings. Key features of the SECURE Act 2.0 include:

  • Automatic Enrollment: Starting January 1, 2025, employers are required to automatically enroll employees when they become eligible in 401(k) or 403(b) plans established after December 29, 2022. The automatic contribution rate must be at least 3% and no more than 10%. The automatic contribution rate must be increased by 1% each year until it reaches at least 10%, but not more than 15%.  An employee may opt out at any time.   This rule does not apply to businesses with fewer than 10 employees, companies that have existed for less than three years, or government or church plans.
  • Required Minimum Distribution (RMD) Age: The RMD age increased to 73 on January 1, 2023, and will increase to 75 by January 1, 2033.
  • Reduced Penalties for Missed RMDs: The penalty for failing to take an RMD was reduced from 50% to 25% and reduced to 10% if corrected promptly (within two years).
  • Roth Accounts in Employer Plans: Effective January 1, 2024, RMDs are no longer required from Roth accounts in employer retirement plans.
  • Matching for Roth Accounts: Employers may amend their plans to allow employees to designate matching contributions to a Roth after-tax account.
  • Catch-Up Contribution Increases:
    • Beginning January 1, 2025, employers have the option of allowing catch-up contributions for individuals aged 60 to 63 increased to $11,250 for 401(k), 403(b), and governmental plans, which is 150% of the regular catch-up contribution of $7,500 for 2025.
    • Effective January 1, 2026, employees 50 or older who earned over $145,000 in the previous year and elect catch-up contributions must make catch-up contributions to a designated Roth 401(k) account in after-tax dollars. (The IRS postponed this requirement from January 1, 2024 to January 1, 2026.)
  • Emergency Savings Accounts: Employers can amend their defined contribution retirement plans to include an emergency savings account associated with a Roth account, allowing non-highly compensated employees to access funds penalty-free.
  • Student-Loan Matching: As of January 2, 2024, employers can match employee student loan repayments with contributions to their retirement accounts, helping employees save for retirement while paying off student debt.  The match rate for student loan payments and elective deferrals must be the same.

Next Steps for Employers: Consult with your retirement plan broker and plan provider to ensure that plan documents are updated to reflect the required changes, as well as any optional changes the company elects to make.  Provide employees with timely and detailed communications about plan changes.  Coordinate with the broker and plan provider to offer educational sessions to employees.

The SECURE Act 1.0 and 2.0 represent significant steps toward improving retirement security for employees. These changes aim to make retirement planning more accessible and effective by increasing the required minimum distribution (RMD) age, expanding retirement plan options, and introducing new provisions for catch-up contributions and emergency savings. As the retirement landscape continues to evolve, these legislative efforts will be crucial in helping individuals achieve financial security in their retirement years.

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