A New Look at SECURE Act 2.0 Issues

The SECURE Act 2.0, part of the Consolidated Appropriations Act of 2023, introduces new provisions that aim to enhance retirement savings. One significant provision pertains to auto-enrollment in new 401(k) plans. Under this provision, all eligible hires must enroll at a minimum pretax rate of 3%, with an annual auto-escalation of 1% until the salary reduction reaches a minimum of 10% and a maximum of 15%. The goal is to incentivize participation in retirement savings accounts.

These provisions will come into effect primarily in 2024 or 2025, allowing ample time to develop and implement them. Employers will have the discretion to offer employees the choice of contribution level, but the default contribution level will be set at 3% pretax for those who do not specify otherwise. These details apply to new retirement savings plans established after December 31, 2024.

Moreover, the SECURE Act 2.0 enhances catch-up contributions, allowing individuals over the age of 50 to contribute more towards their retirement savings plans as they near retirement age. Currently, people aged 50 to 59 can make catch-up contributions of up to $7,500 per person. However, individuals aged 60 to 63 will be able to make catch-up contributions of either $10,000 or 150% of the regular catch-up contribution value for 2024. Notably, high-income earners (those making over $145,000 annually) must contribute required Roth catch-up contributions on a post-tax basis.

These changes will apply to all plans that offer catch-up contributions, effective from tax years following December 31. Additionally, the SECURE Act 2.0 introduces various other modifications related to emergency savings accounts (ESAs).

From 2024 onwards, under specific circumstances, participants will have access to ESA funds without facing early withdrawal penalties or fees. Each year, emergency savings withdrawals up to $1,000 can be made and must be repaid within three years. The withdrawals are available on a post-tax basis, and any matching contributions from employers are allocated to the employee’s 401(k) account, not their ESA.

ESAs can be auto-enrolled at a rate of 3% with contributions capped at $2,500. Eligibility for ESAs is limited to non-highly compensated employees, allowing them four fee-free withdrawals per year, with a maximum of one per month. Regular contributions and the account balance do not impact the emergency withdrawal option. Employees have the choice to cash out their ESAs or merge the funds with Roth 401(k) accounts and IRAs.

Due to the complex infrastructure needed, implementing this provision is anticipated to be challenging. While the effective date is targeted for 2024, it may require further extension. Familiarizing yourself with these provisions ahead of time is crucial, as they involve intricate details. Additionally, there are other provisions to become acquainted with, including the Saver’s Match provision, which will replace the current Saver’s Credit in 2027. This provision is designed for lower-income individuals, offering a government-funded match of 50% up to $2,000 per person, resulting in income increases of $41,000 to $71,000 for those filing jointly.

Remember, these are just the initial details! Consult qualified legal advice for comprehensive understanding.