An Overview of the SECURE Act 2.0

The SECURE Act 2.0, signed into law on December 29, 2022, builds on the provisions from the SECURE Act of 2019.

Aptly named the Setting Every Community Up for Retirement Enhancement, the legislation is designed to enhance the retirement success of Americans and to help employers (retirement plan sponsors) attract and retain talent.

Most of the provisions of SECURE Act 2.0 are effective January 1, 2024, or later. Prior to taking action on any of the items listed in this article, we strongly recommend discussing with a professional tax advisor.

Required Minimum Distributions:

The mandatory required beginning date to begin distributions from qualified plans is increasing. The age at which plan participants must take RMDs increases to age 73 in 2023 and to age 75 in 2033, allowing participants to delay withdrawals. Participants who turned 72 in 2022 or earlier must continue taking RMDs as scheduled.

Beginning January 1, 2024, RMDs will no longer be required from Roth accounts held in
employer retirement plans – 401(k)s or 403(b)s.

Failure to take an RMD will trigger a penalty of 25% of the RMD amount (a reduction from 50%
previously) and can be further reduced to 10% if corrected in a timely manner for IRAs.

Catch Up Contributions:

Beginning January 1, 2025, plan participants age 60-63 will be allowed to make catch-up
contributions up to $10,000 annually to an employer plan. If the participant earns $145,000 or
more in the prior calendar year, catch up contributions (age 50+) must be made to a Roth account with after-tax dollars. Participants earning less than $145,000 are exempt from the Roth requirement and may continue to make “catch-up” contributions via tax deductible salary deferrals. Employers may consider offering a Roth option in their plan to allow for these catchup contributions.

The amount allowed for catch-up contributions will increase in 2025 for 401(k), 403(b),
governmental plans, and IRA account holders.

Employers with defined contribution retirement plans will be able to add an emergency savings
account associated with a Roth account.

Beginning in 2024, IRA catch up contributions will be adjusted for cost of living.

Early Access to Retirement Funds – Expanded

Under SECURE 2.0, emergency withdrawals are maxed at $1,000 and additional withdrawals cannot be made until the first is paid back or until three years has elapsed. Penalty-free distributions are available to participants who are terminally ill (further defined as a participant who has been given seven years to live).

Domestic abuse victims can take the lesser of 50% of their balance or $10,000, starting in 2024. Qualified disaster distributions are permanently reinstated retroactively (limited to $22,000) to disasters that occurred on or after January 26, 2021. Income reporting may be spread over three years and may be repaid. The act also provides for penalty-free distributions up to $2,500
per year for qualified long-term care insurance.

529 Plan Transfers to Roth IRA

529 beneficiaries may now transfer excess funds from a 529 account to a Roth IRA. A transfer
can only be made from a 529 plan to a Roth IRA of the beneficiary of the 529 account (not the
owner of the account). The plan must have been maintained at least 15 years prior to a Roth
transfer.

Beginning in 2024, a transfer in any year is limited to the annual IRA contribution limit during
that year (currently $6,500) and is reduced by any contributions made during the year to an IRA.
For example, Mary, the beneficiary of the 529 plan, contributes $2,000 to her Roth IRA. He
could roll $4,000 from his 529 plan over to the Roth IRA. The aggregate lifetime rollover limit is
$35,000; rollovers cannot exceed the aggregate prior to the 5-year period ending on the date of
the distribution.

Qualified Charitable Distributions:

Taxpayers may now make a onetime transfer of qualified plan assets to split interest charitable
vehicles. In general, split interest in this context means that the account owner/plan participant
may continue to receive funds for a specified period subject to certain maximum withdrawals
under the code to prevent total exhaustion of the account. At the end of the term, residual funds
are then transferred to charity. Account owners may transfer up to $50,000 (one time) to a
charitable gift annuity, charitable remainder unitrust (CRUT) and/or a charitable remainder
annuity trust (CRAT).

Individuals aged 70-1/2 or older can make tax-free individual retirement account (IRA) qualified
charitable distributions (QCDs) of up to $100,000. To qualify as a QCD, the distribution must be
made directly from the IRA trustee to a charity. Any amount distributed as a QCD can be
excluded from the individual’s taxable income. The annual IRA QCD limit of $100,000 will be
adjusted for inflation for tax years beginning after 2023.

Emergency Savings Accounts (ESAs)

These are offered in tandem with qualified retirement accounts and are not available to highly
compensated employees. Funds must be held in cash or cash equivalent accounts and the
maximum balance attributable to contributions is $2,500. Distributions are tax-free.

Employer matching contributions based on student loan payments

Starting in 2024, employers are allowed to make matching contributions for their employees’
student loan payments, regardless of whether the employee is contributing to their plan. The
purpose is to accelerate repayment of student loans to enable employees to save more, sooner
for retirement. Employers should weigh the costs and benefits of matching contribution plans
before instituting a program.

Defined Contribution Plans – Automatic Enrollment

SECURE 2.0 requires that employers adopt automatic saving provisions in defined contribution
plans established beginning 2024. Employers that offer new retirement plans are required to
auto-enroll new employees at 3% of their pay with an auto increase of 1% per year up to at least
10% (but not exceeding 15%). This does not apply to employers with current plans, whether
401(k) or 403(b). In addition, employees must be able to opt out of automatic enrollment.

Plan Amendments

For a retirement plan to be tax qualified, it must comply with the written plan terms in the
SECURE Act 2.0. If an employer fails to amend the plan documents by a certain date, you run
the risk of nullifying the plan’s tax-qualified status. The deadline for plan amendments set by the
IRS and DOL regulations falls at the end of the first plan year beginning on or after January 1, 2025. If an amendment plan was to take effect in the interim, the retroactive amendment would not be considered as a violation in terms of anti-cutback rules unless stated otherwise by the IRS.

Additional Changes to Note

It’s important to note the following additional changes that come with the passing of the
SECURE Act 2.0:

• Coverage for part-time employees (employee who works at least 500 hours/year and
  has been with the employer for three consecutive years) has been modified under the
  Act. Part-time employees under a 401(k) plan can reduce their service requirement from
  three years to two years.
• The Act codifies a maximum allowable deduction for passthrough entities making
  conservation easement gifts. Partners and shareholders of passthrough entities will be
  limited to a deduction that does not exceed 2.5 times their investment in a fund set up for
  the purposes of syndicating conservation easements. There are exceptions for family
  ownership, preservation of certified historic easements and for property held more than
  three years.
• For sales occurring after December 31, 2027, an individual owner of stock in an
  “S” corporation may elect to defer recognition from the sale of a stock (i.e., ESOP) on a
  limited basis. “S” shareholders may defer up to 10% of their proceeds on a sale of
  shares to an ESOP.

Conclusion

As with any new tax legislation, it’s important for employers to proactively discuss the potential
impact of these legislative changes with an experienced tax advisor. Employers that work under
the mentioned amendment plans are well aware of the importance to stay updated on changes
that could affect employees.

The team at Smith + Howard is available to ensure that businesses and employers are prepared
to meet these obligations. If you’re seeking professional tax advice for your business on the
amendment plan changes, please contact an advisor today.