Take-Away: Look forward to some corrective legislation from Congress in 2023 to ‘fix’ some of the problems associated with the SECURE Act 2.0 and, in particular, the opportunity of individuals who are over age 50 to make catch-up contributions to their retirement account.

Background: The SECURE Act 2.0 that Congress pushed through in the last days of 2022 provided over 92 changes to IRAs and retirement plan accounts. Since the Act is over 357 pages in length, it should come as no surprise that some mistake were made in the adoption of the Act. For other new provisions under the Act,  confusion abounds in how to satisfy some of the conditions imposed to qualify for new retirement account savings. . A short list follows of some of the mistakes or clarifications that will need to be addressed by Congress sometime during 2023.

  1. No Catch-Up Elective Deferrals in 2024: Under the Act, high earning ($145,000+)  401(k) participants must make age 50+ catch-up contributions only to Roth 401(k) accounts starting in 2024. But when it adopted this change, Congress inadvertently eliminated the Tax Code section that permits any catch-up contributions to a retirement account starting in 2024. Consequently, as it stands now, neither higher earners, nor any income-level , plan participants can make any catch-up contribution in 2024 to either a traditional 401(k) account or a Roth 401(k) account.
  2. Catch-Up Elective Contributions to Roth 401(k) Accounts: As noted in #1, high earning plan participants may only make catch-up contributions to a Roth 401(k) account. However, Roth 401(k) accounts are optional by the plan sponsor; a Roth 401(k) account not mandated by ERISA. The Act is silent when a plan participant over the age of 50 wishes to make a catch-up contribution to his/her 401(k) account when his/her employer does not adopt a Roth 401(k) feature to its 401(k) plan. Must the plan sponsor add the Roth 401(k) feature to its existing plan? If the plan sponsor refuses to amend it’s 401(k) plan to include a Roth 401(k) feature, does that mean that no participant in its 401(k) plan can make any catch-up contributions?
  3. 401(k) Catch-Up Contributions for High ‘Wage’ Earners: The Act also provides that the catch-up contribution to a 401(k) account applies to those participants whose wages exceed $145,000 (as adjusted) for the prior plan year. But many self-employed individuals who have 401(k) plans do not have wages. Rather, those plan participants only have ‘business income.’ Does this mean that a sole proprietor who has adopted a 401(k) plan will not be required to make catch-up contributions exclusively on a Roth basis, even if their ‘income’ exceeds $145,000?
  4. 529 Rollovers to a Roth IRA: The Act permits a rollover of up to $35,000 of unused 529 funds to a Roth IRA. However, to be eligible to make this rollover to a Roth IRA, the 529 plan/account must have been open for 15 years. The Act is not clear, though, what happens when the 529 account owner changes the beneficiaries of the 529 account. A couple of questions are associated with this new opportunity under the Act: (i) does the $35,000 dollar limit apply per 529 account owner, or does the limit apply for each 529 account beneficiary? and (ii) does the required 15-year 529 account duration apply for each beneficiary, or can the period of earlier 529 beneficiaries be ‘tacked on’ to the last 529 account beneficiary in order to satisfy the 15-year duration condition?
  5. Those Born in 1959 – Two RMDs: The Act extended the required beginning date (RBD) when required minimum distributions (RMD’s) must begin by the retirement account owner. The way the Act is currently written, an individual who was born in 1959 will actually have two RMD ages: 73 and 75. It is pretty clear that Congress intended that an individual retirement account owner should have only one RBD to contend with.
  6. 10% Penalty Exception: A new feature of the Act is that some (but not all) public safety employees may not face the 10% early distribution excise tax if those employees receive a distribution from their retirement account after they have 25 years of service. This exception from the 10% excise tax will apply even if the public safety employee is under the age of 50 years. The problem is that the Act does not specify if the 25 years of service must be with the same employer, or if prior service with other eligible employers can be ‘tacked on’ in order to satisfy the 25-year condition.

Conclusion: The SECURE Act 2.0 provides additional incentives to save for retirement, while also recognizing that most individuals now save for their future through contributions to their retirement accounts, thus requiring more exceptions to the Tax Code’s early distribution penalty. Unfortunately, with many of these new rules under the Act comes some confusion and uncertainty. While the IRS can provide helpful interpretations for some of these new provisions through publishing  its Proposed Regulations, a couple of the ambiguities noted above will require that Congress act before 2024 to ‘fix’ the problem.