SECURE 2.0: Retirement savings plan changes, drafting error, tax and administrative implications

As expected, Congress – with bi-partisan support – has passed legislation that will have far-reaching implications for retirement plan savings plans. This article covers several topics about SECURE 2.0, including:

• Basics of the SECURE Act of 2022
• History of SECURE 2.0
• Key provisions of SECURE 2.0
• SECURE 2.0 drafting error

The grouping of retirement plan provisions, commonly called the SECURE 2.0 Act of 2022 (SECURE 2.0), were included in the 2023 Consolidated Appropriations Act (also known as the Omnibus Bill).

However, last week the American Retirement Association (ARA) pointed out that there is a "significant technical error" in the Act related to catch-up contributions.

In fact, according to ARA CEO Brian Graff, SECURE 2.0 contains a drafting error that could keep retirement plan participants from making catch-up contributions starting in 2024.

What is the SECURE 2.0 Act of 2022?

SECURE 2.0 is comprehensive legislation intended to expand and increase retirement savings, especially for low-income and part-time employees, and to simplify and clarify many complex and confusing existing retirement plan rules. It builds on the SECURE Act of 2019 (SECURE Act), which increased the age of required minimum distributions (RMDs) and eliminated age requirements for traditional IRA contributions.

The SECURE Act 2.0 expands automatic enrollment programs to help small employers sponsor plans for employees, and enhances certain credits to make saving for retirement more beneficial to both individuals and plan sponsors. It also improves individual investment options, streamlines plan administration, and makes significant changes to required minimum distributions (also known as RMDs). These changes give taxpayers more flexibility in how they use qualified retirement savings and avoid excise taxes for early withdrawals in certain cases.

History of SECURE 2.0

In March, the House passed a version of the bill, known as the SECURE Act 2. The Senate Finance Committee proposed an even larger version later this year, known as EARN Act. Neither passed, and SECURE 2.0 reflects what was ultimately agreed to by both houses of Congress. 

Key provisions in SECURE 2.0

Mandatory automatic enrollment.

Effective for plan years beginning after December 31, 2024, new 401(k) and 403(b) plans must automatically enroll employees when eligible. Automatic deferrals start at between 3% and 10% of compensation, increasing by 1% each year, to a maximum of at least 10%, but no more than 15% of compensation.    

Increased age and decreased penalties for required minimum distributions.

SECURE 2.0 increases the age for required minimum distributions (RMDs) to 73, beginning on January 1, 2023, and to age 75 on January 1, 2033, for certain individuals. In addition, the penalty for not taking the RMD decreases from 50% to 25% of the RMD amount, and 10% for IRAs if corrected timely. In addition, Roth accounts in employer retirement plans will no longer have required RMDs.

Editor's note: SECURE 2.0 suffers from several drafting errors, including one about RMDs. This drafting error, unless corrected by Congress, means that individuals born in 1959 have two RMD ages - 73 and 75.  See SECURE 2.0 drafting errors below for more details.

See this article regarding how SECURE Act 2.0 changed RMD rules for some individuals for more details.

Increase in catch-up limits.

For those aged 50 or older, the retirement plan contribution limit is increased (“catch-up contributions”). For 2023, the catch-up contribution amount is limited to $7,500 for most retirement plans and is subject to inflation increases.  

SECURE 2.0 provides a second increase in the contribution amount for those aged 60, 61, 62, or 63, effective for tax years after 2024. For most plans, this “second” catch-up limitation is $10,000, and $5,000 for SIMPLE plans. Like the “standard” catch-up amounts, these limitations are subject to inflation adjustments.  

The annual limit on contributions to individual retirement accounts (IRAs) is also increased for participants aged 50 and older. The “catch-up” limit for IRAs is $1,000. Unlike the catch-up amount for other plans, this amount is not subject to increases for inflation under current law. The bill would make the IRA catch-up amount adjusted annually for inflation for tax years beginning after 2023.  

Finally, for tax years beginning after 2023, all catch-up contributions are subject to Roth (i.e., after-tax) rules, rather than only where allowed by the plan in which the individual participates.

Editor's note: SECURE 2.0 suffers from several drafting errors, including one about catch-up contributions. This drafting error, unless corrected by Congress, eliminates the ability for any individual to make pre-tax or Roth catch-up contributions starting in 2024. See SECURE 2.0 drafting errors below for more details.

Penalty-free emergency withdrawals are allowed under certain circumstances.

Penalty-free distributions are allowed for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses” up to $1,000.

Only one distribution may be made every three years or one per year if the distribution is repaid within three years.  

Penalty-free withdrawals are also allowed for small amounts for individuals who need the funds in cases of domestic abuse or terminal illness.

Employer matching of student loan repayments is allowed.

Effective for plan years beginning after December 31, 2023, employers can match student loan repayments as if the student loan repayments were deferrals. 

Automatic rollover rules change.

Currently, plans may automatically distribute small accounts of less than $5,000 to former participants. If the distribution is greater than $1,000, the plan must roll the account into an IRA.  

Effective 12 months from enactment, SECURE 2.0 permits the transfer of default IRAs into the participant’s new employer’s plan, unless the participant affirmatively elects otherwise. SECURE 2.0 also increases the limit for automatic rollovers from $5,000 to $7,000. 

Long-term, part-time workers qualify more easily.

Under current law, employees with at least 1,000 hours of service in a 12-month period or 500 service hours in a three-consecutive-year period must be eligible to participate in the employer’s qualified retirement plan. SECURE 2.0 reduces that three-year rule to two years for plan years beginning after December 31, 2024.  

If the retirement plan allows, non-highly compensated employees can defer up to the lesser of 3% of compensation or $2,500 (post-tax) to an emergency savings account.  

De minimus incentives for participation are allowed.

Employers may offer de minimis financial incentives, such as low-dollar gift cards, to boost participation in retirement plans. The financial incentives cannot be purchased with plan assets. 

Database to locate missing participants and funds is created. 

SECURE 2.0 creates a national online searchable database to enable employers to locate “missing” plan participants and plan individuals to locate retirement funds.  

In short, SECURE 2.0 is a comprehensive legislative attempt to increase retirement savings and access to 401(k) and individual retirement accounts and savings, particularly for low- and middle-income workers, and those with significant student debt. It is also intended to increase the number of small businesses offering retirement plans to their workers and provide access to others who don’t yet have long-term retirement accounts.  

What are the SECURE 2.0 drafting errors, and what they mean for retirement plan participants

SECURE 2.0 was 357 pages long, with 92 new IRS and retirement plan changes; it's no surprise that there were several drafting errors and a few unresolved questions requiring technical corrections. There are several identified drafting errors / unresolved questions, one each around catch-up contributions, when required minimum distributions must start, and small employer pension plan startup costs.. 

SECURE 2.0 section 102: small employer pension startup credit drafting error

Section 102 of SECURE 2.0 enhances and expands tax credits available to eligible businesses who establish a new simplified employee pension (SEP), savings incentive match plan for employees of small employers (SIMPLE) plans, or qualified retirement plan like a 401(k) plan. The startup tax credit increases from 50% to 100% of the costs of starting a retirement plan, up to a maximum amount of $5,000. 

Specific to SEP employer startup contributions, section 102 includes a tax credit for the first five years of a qualified new plan, up to $1,000 per employee. Due to ambiguity in section 102' language, there is concern that the additional credit for employer contributions is subject to the $5,000 dollar limit that otherwise applies to the startup credit.

However, according to a recent bipartisan Congressional letter, "Congress intended the new credit for employer contributions to be in addition to the startup credit otherwise available to the employer." 

SECURE 2.0 section 107: required minimum distributions drafting error

Section 107 of SECURE 2.0 made several welcome changes to required minimum distributions (RMDs), as discussed above. However, due to a lack of clarity in section 107's language, individuals born in 1959 are in a unique position of having two RMD ages - 73 and 73. 

The bipartisan Congressional letter sent recently clarifies that "Congress intended to increase the applicable age from age 72 to age 73, for individuals who turn 72 after December 31, 2022 and who turn 73 before January 1, 2033, and to increase the applicable age from age 73 to age 75 for individuals who turn 73 after December 31, 2032."

SECURE 2.0 section 603: catch-up contribution drafting error

According to the ARA CEO Brian Graff, if the legislation is not corrected, beginning in 2024, retirement plan participants will not be able to make catch-up contributions to pre-tax or Roth accounts. According to Graff, "obviously, this significant technical drafting error was not intended, and it will need to be corrected. The real question is when there will be a legislative vehicle in this Congress to get this done. In the meantime, it is unclear whether Treasury has the regulatory authority to ignore this error in the interim, potentially putting 2024 catch-up contributions at risk if Congress does not act before then."

The error specific to catch-up contributions comes from section 603, which tried to align SECURE 2.0 to the IRC. Included below is a detailed analysis from the National Association of Plan Advisors (NAPA), but in short, the goal of the change in section 603 was to require that higher-income 401(k) participants make age-50-or-over contributions to Roth plans, while leaving an exception for individuals who earn less than $145,000 per year. However, the actual result eliminates the ability for any individual to make pre-tax or Roth catch-up contributions starting in 2024.

In more detail, from a recent National Association of Plan Advisors (NAPA) article: The problem is section 603(b)(1), which makes a conforming amendment attempting to align the language to the Internal Revenue Code by deleting subparagraph (C) of IRC §402(g)(1). IRC §402(g) generally provides for the exclusion of elective deferrals from a participant's taxable income. The first two subparagraphs of IRC §402(g)(1) set the general limits on the number of elective deferrals an individual may exclude from income. The third subparagraph, which was deleted as part of the Act, increased the general pre-tax deferral limit by the amount of any catch-up contributions—and thus the elimination of that subparagraph technically eliminated the ability to make ANY pre-tax catch-up contributions (even for those who earn less than or equal to $145,000).

To make matters more confusing, under IRC §402A, a participant can only designate a deferral as Roth if the deferral could otherwise be made on a pre-tax basis. Because the ability to make catch-up contributions on a pre-tax basis was eliminated, this means no catch-up contributions may be on a Roth basis either. Thus, participants cannot make catch-up contributions.

According to the same bipartisan Congressional letter cited above, "Congress did not intend to disallow catch-up contributions nor to modify how the catch-up contribution rules apply to employees who participate in plans of unrelated employers. Rather, Congress’s intent was to require catch-up contributions for participants whose wages from the employer sponsoring the plan exceeded $145,000 for the preceding year to be made on a Roth basis and to permit other participants to make catch-up contributions on either a pre-tax or a Roth basis."

How can the SECURE 2.0 drafting errors and unresolved questions be corrected?

In years past, Congress would pass Technical Corrections legislation intended to correct inadvertent errors such as this. However, getting technical corrections through the Congressional process has been much more difficult over the last three years. Despite recent history, ARA Retirement Education Counsel Robert Richter is hopeful that Congress will act before to correct this given the significance of getting it done before 2024.

On May 23, 2023, a bipartisan group of Senate and House members wrote an open letter to Secretary of the Treasury Janet Yellen and IRS Commissioner Daniel Werfel stated that they intended to correct the four technical errors highlighted above, but did not set out a deadline or timetable to do so.

Looking to learn more about SECURE 2.0 and the 2023 Consolidated Appropriations Act?

Our Research and Learning department has released a detailed tax briefing that dives into the details of the 2023 Consolidated Appropriations Act and the SECURE Act 2.0. 

Download the 2023 Consolidated Appropriations Act and the SECURE Act 2.0 brief to learn more.