Take-Away: There are some provisions in the SECURE Act 2.0 that may have either been overlooked or which not have received much attention in the media. The SECURE Act 2.0 has many provisions, but just how impactful they will be to promote more retirement savings is subject to serious debate.

Background: The SECURE Act 2.0 provided a ‘grab bag’ of miscellaneous provisions that pertain to retirement plans, including contributions, distributions and penalties. While prior ‘missives’ have covered many of these changes, there are a few new provisions that have not received much attention (so far.) Some of those provisions follow-

Long-term Care: Starting in 2026, up to $2,500 per year may be used from a retirement account to pay for qualified long-term care coverage.

Public Safety Officers: Private sector firefighters, state and local corrections officers, and public safety officers with 25 years of service with their employer, if over the age 50, can begin to receive distributions from their retirement accounts without incurring the 10% penalty for an ‘early distribution.

Surviving Spouses: A surviving spouse has the option to elect to treat an inherited qualified retirement account as his/her own, or leave the retirement account as inherited, and in the latter case distributions must begin no later than the age at which the deceased account owner would have turned age 73. However, if the second option is selected by the surviving spouse, the survivor must take required minimum distributions (RMDs) every year once the RMDs are triggered, based on the surviving spouse’s own age, using the factors from  less favorable the Single Life Expectancy Table.

Catch-up IRA Contributions: The $1,000 a year catch-up IRA contribution will now be indexed for inflation. Any increases will be only be in $100 increments.

Qualified Annuitization of a Retirement Account: Previously, a portion of a qualified retirement account that has been annuitized for the owner’s life expectancy, or a shorter period, has been allowed to satisfy the RMD obligation for only the portion of the account that has been annuitized. Now, the excess annuitized distributions will count towards the owner’s RMD obligation for the rest of the owner’s retirement account.

Example: Charlotte is age 75. She owns two IRAs, one worth $200,000 and the other worth $100,000. Charlotte decides to annuitize the IRA worth $200,000, for a fixed ten-year period. The immediate annuity distributions satisfy Charlotte’s RMD obligation with regard to the account that has been annuitized, because the annuitization period is much shorter than Charlotte’s life expectancy. Beginning this year, with the Act’s change, the excess distributions received by Charlotte will ‘count’ towards the RMD obligation for the rest of Charlotte’s IRA accounts. However, it is not yet clear [we await updated Regulations] how much of a particular distribution will be considered excess.

In addition, the amount of a retirement account that is set-aside as a qualified longevity annuity (QLAC) increases the maximum amount that can be used to purchase a QLAC from $125,000 to $200,000.

Substantially Equal Installment Payments: Many individuals use the life expectancy distribution method to avoid the 10% early distribution penalty if they are under the age 59 ½.  The prior IRS Regulations required that those individuals who take such equal distributions to leave the qualified plan intact with the current plan custodian. The Act now makes it possible to do a partial, or complete, rollover from an account from which the installment distributions are taken. [IRC 72(t)] The new accounts must continue to meet the obligations imposed by IRC 72(t). That means that distributions from the ‘new’ custodial account must continue unchanged for the longer of 5 years from the commencement,  or until age 59 ½, whichever is longer. The individual is allowed to mix and match distributions from the new retirement accounts in whatever proportion, just so long as the total distributions from both are exactly equal to those required by IRC 72(t).

In addition, to clarify some earlier confusion arising from the Regulations, when an individual takes distributions from a retirement plan account using the substantially equal installment distribution method, it is now clear that life annuitization (or joint life of the account owner plus beneficiary) will satisfy the IRC 72(t) safe harbor, which assures that the early distribution penalty will not be triggered.

Employer Contributions to Roth Accounts: Previously, an employer’s contribution on behalf of a participant in a 401(k) plan (or a 403(b) or a 457(b) plan) had to be made into the pre-tax account, rather than an available designated Roth account. Beginning in 2023, employers are authorized to make matching or non-elective contributions into a participant’s designated Roth account. Note, however,  that an employer’s contribution made under this new provision will be immediately taxable income to the plan participant.

High Income Plan Participants: The Act imposes a new restriction with regard to catch-up contributions by high income plan participants. Those plan participants who earn more than $145,000 a year (which amount will be indexed for inflation) will be required to make their catch-up contributions into a designated Roth account. Accordingly, this catch-up contribution by a high income earner will be taxable to the individual. The  ‘acceleration’ of income tax liability arising from this change is intended to defray, in part, the lost tax  revenues that results from many of the other ‘grab bag’ changes prompted by the Act. Note that if the qualified plan sponsor does not offer this designated Roth option, or if the high income earner chooses to not make the deposit into the available designated Roth account, this opportunity to make an age-based contribution will be lost.

Solo 401(k) Plan: The deadline to establish a solo 401(k) plan for last year was December 31, 2022. The participant was also required to make the elective deferral by the same end-of-year date. Beginning in 2023, the set-up and deferral election deadlines have been moved back to the due date for the employer’s annual tax return, but not including any extension of that filing date.

Student Loan ‘Match:’ Beginning in 2024, an employer will be able to amend its qualified plan to allow the employer to match amounts paid by a plan participant towards their student loans as if those debt repayments were salary deferral contributions to the qualified plan.

Missed RMD Penalty: In the past there was a 50% penalty for those individuals who failed to take an RMD distribution from their own retirement account or from an inherited retirement account. If that occurred, the individual then had to ask the IRS to forgive the penalty by filing Form 5329, and submit a letter of explanation. The Act now changes the penalty, reducing it from 50% to 25% to 10% if the individual fixes the failure and takes a corrective distribution of (i) when the IRS catches the missed distribution; or (ii) before the end of the second calendar year after the missed RMD.

Good News: On the bright side, the SECURE Act 2.0 did not eliminate the ‘back-door’ Roth conversion strategy that some worried would be part of the final legislation.

Conclusion: It is pretty clear that the SECURE Act 2.0’s goal, in part, is to increase the amount of Roth contributions. That goal  is less so out of a desire to see more individuals enjoy tax-free income in their retirement years, but more out of a need to accelerate current tax revenues through taxable Roth contributions. It is also clear that Congress tacitly acknowledges that the retirement plan distribution rules are unduly confusing, so it decided to provide more relief from penalties that arise from mistaken distributions. It is also an acknowledgement  that most individuals now ‘save’ through their retirement accounts, such that when emergencies arise that need to be financially addressed, taking funds from a retirement ‘savings’ account triggers an unfair penalty tax.