Here’s what’s included in Secure Act 2.0, and what it could mean for your clients
Secure Act 2.0 is now law. The legislation, which was negotiated from three separate bills, was included as part of a sprawling $1.7 trillion deal1 to fund the government through much of 2023, and its goal is to make it easier for Americans to save for retirement. Not only does the law have broad bipartisan support, but according to a recent survey from LPL2, 95% of financial professionals polled support federal retirement legislation.
“Including Secure 2.0 retirement provisions in the last major legislation of the year means that Congress is poised to help millions more workers and retirees with significant improvements to the nation’s private retirement system,” Paul Richman, Chief Government and Political Affairs Officer of the Insured Retirement Institute said in a statement3. “We expect that the legislation will add billions to the retirement savings for small business workers, part-time workers, employees with student loan debt, military spouses, low-income workers, and others.”
If your clients have questions about what’s In the Secure Act 2.0, you’ll want to be sure you have the answers. Let’s take a closer look at several ways Secure Act 2.0 can help both financial professionals and their clients.
One of the most consequential components of Secure Act 2.0 is that it creates automatic employee enrollment in company retirement plans — employees would have to opt out of contributions. More specifically, the bill requires employers to automatically enroll new eligible employees at a minimum contribution rate of 3% of their annual salary in a 401(k) or 403(b). Furthermore, it would increase by 1% each year until it reaches at least 10%, but not more than 15%. This will be effective beginning in 2025.
Under the current law, those 50 and older can make additional contributions to their 401(k). (In 2021, the limit was $6,500 but it’s adjusted for inflation each year). Beginning in 2025, Secure Act 2.0 increases the limit for people between the ages of 60 and 63 to the greater of $10,000 or 50% more than the regular catch-up amount. The increased amounts are indexed for inflation after 2025. Additionally, beginning in 2024, Secure Act 2.0 requires all catch-up contributions made to the plan to be made on a Roth (or after-tax) basis in an effort to generate more revenue for the government. There is an exception for employees with compensation of $145,000 or less (indexed for inflation.)
Provisions that comprise Secure Act 2.0 also would aim to make it easier for Americans to save for emergencies. The first would allow businesses to offer a pension-linked emergency savings account and automatically enroll their employees in that account, contributing no more than 3% of their salary up to $2,500. These contributions would be made on a Roth-like basis (after tax). Additionally, effective in 2024, employees would be able to withdraw up to $1,000 from their normal retirement account for certain emergencies without having to pay the typical 10% penalty.
Small business benefits
Thanks to an increase in the federal small business start-up tax credit, business owners may be more incentivized to set up retirement plans for their employees. Among the changes is an increase to the start-up tax credit from 50% to 100% of administrative costs for employers with up to 50 employees and additional credits are available for employers with up to 100 employees.
RMD age increases
The original Secure Act, passed in 2019, increased the required minimum distribution (RMD) age from 70 1/2 to 72. Secure Act 2.0 takes things even further. Starting on Jan. 1, 2023, the age bumps up to 73 and in 2033 it will increase again to 75. These changes to RMD rules could help Americans extend the longevity of their money.
QLAC limits increase
Qualified longevity annuity contracts, or QLACs, are deferred income annuities within an IRA or qualified plan. A benefit of a QLAC is that funds held within it are not included in the calculation of RMDs. Rather, distributions from a QLAC can be deferred until age 85. Effective immediately, the previous lifetime contribution limits of the lessor of $155,000 (2023) or 25% of total IRA and qualified balances is increased under Secure Act 2.0 to simply $200,000 (indexed). The 25% limitation is now eliminated.
Student loan matches
Rising student loan debt balances have become an increasing problem for many Americans. To allow employees to both pay off student loan debt and save for retirement, Secure Act 2.0 permits employers to make matching contributions under a 401(k) plan for payments employees make on their student loans — this applies to all student loans, not just subsidized loans. Now, employees can pay off their loans and at the same time, save for retirement through matching contributions. This will become effective in 2024.
Long term care
Increasing medical costs and improved longevity for many Americans has put a spotlight on long term care insurance. Under the Secure Act 2.0, $2,500 annually may be distributed from retirement plans, exempt from the 10% early withdrawal penalty, for payment of premiums on certain long term care insurance contracts. This will be effective 3 years after the date of enactment of Secure Act 2.0.