Since the Consolidated Appropriations Act of 2023 was signed by President Biden on December 29, 2022, we have been reviewing the details.
At over 350 pages, there is a lot to sort through.
The omnibus budget package consolidated retirement rules changes from several recent House and Senate bills into what has been referred to a SECURE Act 2.0.
In a prior article, we covered changes related to Roth plans, Catch-Up contributions, and Hardship distributions.
Required Minimum Distributions
A set of new rules increase the age at which Required Minimum Distributions (RMDs) must be taken, bring consistency to IRA and 401(k) plans by eliminating RMDs from 401(k) designated Roth accounts, and reduce the penalties for failure to take RMDs. A new spousal account option provides the benefit of lower RMDs to those who inherit an account from a younger spouse.
RMD Age Increased (Again)
The SECURE Act of 2019 marked the first increase in the starting date for Required Minimum Distributions since the concept was introduced with Tax Reform Act of 1986. The age at which RMDs must begin was changed from 70 ½ to 72.
Under the new rules in SECURE 2.0, the required beginning date for mandatory distributions from retirement plans has been increased to a new “applicable age.”
The applicable age will be 73 for individuals who reach age 72 after December 31, 2022 and before January 1, 2033, and 75 for individuals who reach age 74 after December 31, 2032.
These changes will apply to distributions required to be made after December 31, 2022.
No RMD Required for Roth Accounts of Qualified Plans
Roth IRA plans have always been exempted from Required Minimum Distributions.
Prior to SECURE 2.0, however, the Roth Designated Account in an employer plan like a 401(k) was still subject to the same RMD rules as a tax-deferred IRA or 401(k).
This forced many 401(k) participants nearing the RMD applicable age to rollover assets from a 401(k) Roth account – including a Roth Solo 401(k) – to a Roth IRA if they did not want to be forced to take distributions.
SECURE 2.0 eliminates RMDs for Roth Designated Accounts in 401(k) and similar employer plans.
This change takes effect starting in 2024.
Lower Penalty for RMD Not Taken
The failure to take a RMD used to come with a 50% excise tax on the amount not taken. Starting in 2023, this penalty has been reduced to 25%.
If a missed Required Minimum Distribution is taken within a “Correction Window” the penalty is reduced to 10%.
The correction window is the period between January 1st of the year following the missed RMD and the earliest of the following dates:
- When the IRS mails a Notice of Deficiency to the taxpayer
- The tax is assessed by the IRS
- The last day of the second tax year after the tax is imposed
New Spousal Beneficiary Option to be Treated as the Original Plan Holder
Spouses have always received special treatment when inheriting an IRA, 401(k), or other retirement plan. SECURE 2.0 adds a new option, which is to be treated as the deceased spouse.
For spouses who inherit an account from a younger partner, this can have several advantages:
- RMDs are delayed until the deceased spouse would have reached the applicable age.
- RMDs are then based on the Uniform Lifetime Table using the deceased spouse’s age, rather than on the Single Lifetime Table using the inheriting spouse’s age.
- If the surviving spouse dies before RMDs begin, their beneficiaries will be treated as if they were the original beneficiaries on the account, which may change their distribution options.
SIMPLE IRA Plan Changes
Increased Employer Contributions for SIMPLE IRA Plans
Starting in the 2024 tax year, contribution limits for SIMPLE IRA plans will increase.
SIMPLE plans require employer contributions of either 2% of compensation or 3% of employee elective deferral contributions. Section 116 of the Act permits employers to make additional contributions up to the lesser of 10% of compensation or $5,000.
Section 117 increases the annual deferral limits to 110% of the 2024 limit, with indexing to inflation in future years, for employers with no more than 25 employees.
Employers with 26-100 employees can also provide these higher limits, but only if they provide a 4% match or a 3% employer contribution.
Solo 401(k) Plan Changes
First Year Solo 401(k) Employee Deferrals
Prior to the 2019 SECURE Act, you had to establish a Solo 401(k) by December 31st of the plan year to be able to make contributions at all.
SECURE 1.0 allowed for a plan to be established up until the tax filing date of the business, including extensions and still accept employer contributions only for the prior tax year.
SECURE 2.0 permits self-employed plan participants who are sole proprietors or sole owners of a pass-through LLC to make employee deferrals to a plan that is established between the end of the tax year and the tax filing date.
This new rule starts with the 2023 plan year.
401(k) Eligibility for Part-Time Employees
The original SECURE Act of 2019 extended 401(k) eligibility to “long-term part-time” employees working more than 500 hours per year for three consecutive years beginning in 2021.
SECURE 2.0 reduces the years of service to two starting in 2023. Such part-time employees will be eligible for plan participation starting in 2025.
Amendment Deadline in 2025
The deadline to adopt 401(k) plan amendments to reflect the new laws the end of 2025. We will not be surprised if this deadline gets extended for at least some of the more complex new rules.
Many of the new rules can be adopted and deployed before plan amendment has taken place. Some new rules will require updated plan language or administrative forms before they can be implemented.
We will cover this topic in more detail as more information becomes available.
Safeguard Advisors Solo 401(k) clients with an active document maintenance subscription will receive plan amendments when they are released. In most cases, it can be a year or two before congressional language is translated into 401(k) amendments.
Some Headline Changes that do not Impact Individual Self-Directed Plans
The features we have covered above and in our first article apply to self-directed IRA and Solo 401(k) plan holders. You may want to have a conversation with your tax counsel and consider new strategies or adjustment to existing plans that will either keep you in compliance or allow you to take advantage of new benefits.
Following are a few of the bigger changes in the law that will get a lot of media coverage, and may or may not impact you as an individual if you participate in an employer 401(k) at work, but really do not intersect with the individual IRA and Solo 401(k) plans we offer at Safeguard Advisors.
Auto Enrollment in 401(k) plans
Employers with more than 10 employees will have to automatically enroll employees in a new 401(k). A Solo 401(k) will not be impacted.
Student Loan Repayment Matching
Larger employers can view eligible student loan repayments as if they were employee deferrals into the company 401(k) plan, and provide an employer match on those dollars. This will be a nice tool for attracting and retaining younger talent.
A Solo 401(k) does not have a matching provision, so this feature will not allow you to consider your own student loan payments as contributions to your own Solo 401(k) plan and then apply a company match.
Emergency Savings Accounts
Section 127 of the act creates a pension linked Emergency Savings “sidecar” account that can be held within a 401(k) or similar employer plan starting in 2024. This small account of up to $2,500 allows for tax-free withdrawals in an emergency. This feature only applies to larger employer plans.
Small Employer Startup Credits
This credit towards the cost of plan setup and even some initial contributions only applies to 401(k) plans that provide coverage to non-owner employees – which of course a Solo 401(k) cannot.
Wrapping Up – For Now
We hope this initial overview of the changes implemented with with SECURE 2.0 has been helpful.
It is our intention to work though these new rules over the next several months and provide additional details, point out some new strategy options, help with compliance guidance, and cover some of the smaller administrative topics that did not make the cut in this first look.