Take-Away: The SECURE Act 2.0 is to become the law before the end of 2022. The focal point of this  legislation is to enable more individuals to save for their retirement, while encouraging more to save through Roth retirement accounts. Not lost, though, is the reality that the more individuals save for their retirement using Roth accounts, the more tax revenues Congress currently generates.

Background: The SECURE Act 2.0 consists of over 4,000 pages. This means that few actually know what actually is in the Act, as only a part of the $17 trillion omnibus spending bill passed by Congress. [The House’s vote was 225 to 201, while the Act was pitched to the public as bipartisan.} While the Act is called the SECURE Act 2.0, it also includes three other bills that were considered by Congressional committees during 2022, including: (i) Securing a Strong Retirement Act (H.R. 2954); (ii) the Rise and Shine Act (S. 4353); and the EARN Act (S. 4808). As noted, since the Act is over 4,000 pages, there will be a lot of surprises in the Act, and no doubt even more surprises by the time the IRS gets around to drafting it’s Regulations to interpret and implement the Act. What follows are some of the key features of SECURE Act 2.0 and what most think they mean, many of which you have previously read about throughout the year and in these missives.

New Retirement Plan Inducement provisions:

Starter 401(k) Plans: The Act allows employers that do not currently sponsor retirement plans to offer starter 401(k) plans, or a safe harbor 403(b) plans for non-profit organizations. This goal is to possibly expand coverage of 401(k) plans to over 19 million employees who currently do not have a 401(k) plan available to them. A 100% tax credit would be available to businesses to adopt such plans, which is intended to pay for the cost of the start-up of the new qualified plan for its first three years. This provision starts in 2023.

Pooled Employer Plans: This concept started with the original SECURE Act, but is now being expanded. The Act moves beyond 401(k) plans to 403(b) plans. It is intended to help small businesses participate in joint collective retirement plans in order to reduce administrative and cost burdens associated with a qualified plan. This new focus is on tax exempt organizations, e.g. public schools, to structure their plans as collective investment trusts (CITs). This will enable 403(b) custodial accounts to participate in group trusts with other tax-preferred plans and IRAs.

Automatic Enrollment: In exchange for the enhanced tax credit available to new qualified plan sponsors, one condition is that new 401(k) and 403(b) plans must automatically  enroll plan participants with a deferral of at least 3% of their salary by the end of 2024. This salary deferral obligation will then increase at the rate of an additional 1% for each year, rising to 10% of the participant’s annual pay. Plan participants can affirmatively opt-out of this automatic salary deferral.  Employers with fewer than 10 employees will be exempt from this auto-enroll/increasing deferral rate requirement.

Family Attribution Rules: The Act reforms existing family attribution rules to remove attribution for spouses with separate and unrelated businesses who reside in community property states. The Act also removes attribution between parents with separate and unrelated businesses who have minor children.

Plan Compliance Resolution: The current IRS Employee Plan Compliance Resolution System (EPCRS) will be expanded to be more lenient and forgiving for those qualified plan sponsors that do not comply with IRA Regulations. [What leniency Congress intends and what the IRS actually comes up with in the form of implementing Regulations is another matter entirely!]

New Retirement Plan Contribution Provisions:

IRA Catch-up:  The Act provides that catch-up IRA contributions (for those age 50 and older), currently limited to $1,000, will be adjusted for inflation annually starting in 2023.

Higher Catch-Up Contributions for Some:  Currently the catch-up contribution limit is $6,500 for a qualified plan and $3,000 for contribution to a SIMPLE IRA sponsored by an employer. Under the Act, the catch-up contribution limit is increased to $10,000, (or $5,000 contributions to a SIMPLE IRA, for individuals who are ages 60, 62, 62, and 63 beginning after December 31, 2024. [It remains a mystery why only those between 60 and 63 benefit from this enhanced catch-up contribution option. It is just one more rule that advisors will have to keep in mind, and retirement account owners will forget and mistakenly make an excess contribution to their retirement account!]

Mandatory Roth Catch-Up Contributions: Perhaps one of the most controversial provisions of the SECURE Act 2.0 is the provision that all catch-up contributions will be taxed as Roth contributions, which means that they will be subject to income tax before the net funds are invested for retirement. [More on this mandatory Roth contribution provision below.]

Savers Credit: The Act increases the income tax credit for low income savers. However, this only starts in 2027.  This changes from a credit paid in cash as part of an income tax refund to a government matching contribution that must be deposited in the saver’s IRA or retirement plan account. An estimate accompanying the Act is that upwards to 108 million workers would be eligible for this matching contribution. The income tax credit will set at a fixed 50%  under the Act, rather than have the tax credit decline as the individual earns more.

Emergency Savings:  Under the Act, qualified plans will authorize the plan sponsor (i.e. employer) to offer employee pension-linked emergency savings accounts. The participant- employee’s maximum contribution would be limited to $2,500 a month. The participant-employee could withdraw up to $1,000 one time each year for personal of family emergencies without ‘tax concerns.’ Unclear is whether the ‘tax concern’ is an authorized distribution without an early distribution penalty, or if it authorizes a distribution from the emergency ‘savings’ account without any income tax consequence.

Student Loan Repayments: The Act adds a provision that treats a plan participant’s student loan repayment as an elective deferral of their compensation for purposes of qualifying for a matching contribution by their employer to a 401(k) plan account.

Excess Contribution:  An individual who makes an excess contribution to a retirement account faces a 6% penalty until the excess amount is removed from the retirement account, along with the earnings on that excess amount. That penalty, or excise tax, is reduces and made easier to self-correct.

Part-time Employees: Retirement savings access to qualified plans will be made available to part-time employees who stay with the same plan sponsor for several years.

Longevity Annuities:  The amount that can be set aside in a qualified plan account in the form of a qualified longevity annuity contract (QLAC) increases from $135,000 to $200,000. This amount that is set aside in a QLAC is not ‘counted’ when the determination is made for the participant’s required minimum distributions (RMDs) for the year. The goal behind this provision is to supplement Social Security income and provide something of a ‘safe harbor’ from market volatility for a limited amount of retirement assets when the retirement plan owner is over the age of 80.

IRA Prohibited Transactions: If an IRA owner engages in a prohibited transaction, only the amount that constitutes the prohibited transaction with the IRA will be disqualified and subject to immediate tax and excise tax (or penalty.) The remainder of the owner’s IRA account balance will continue to be qualified and not subject to immediate income taxation.

New Retirement Plan Distribution Provisions:

Required Beginning Date: The current required beginning date (RBD) when required minimum distributions (RMD) must begin is extended. The age goes from age 72 to age 73 starting in 2023. Those individuals who turn age 74 after December 31, 2033 can delay their first RMD until they reach age 75. If an individual turns age 72 in 2022, they are still subject to the age 72 required beginning date (RBD) along with the obligation to take an RMD. The report accompanying the Act notes that most individuals take more than their RMD. Consequently, this subtle shift in the RBD to age 73 will primarily benefit a wealthy account owner who can leave his/her money one more year in their retirement account to grow before having to take the minimum amount.

Failure to Take Distribution: If a retirement account owner is subject to taking required minimum distributions (RMDs) and he/she fails to take the RMD, then a 50% excise tax is imposed on the amount that should have been taken by the account owner. The Act reduces that excise tax to 25%.

Early Distribution Penalty: If the IRA owner is the victim of domestic violence, that victim may withdraw up to $10,000 from his/her IRA without having to pay the 10% early distribution penalty if the victim is under age 59 ½. The distribution will, however, still be subject to income tax.

Auto-Portability: The Act adds provisions to promote the automatic portability of retirement accounts when a plan participant changes to a new employer that sponsors a qualified retirement plan.

Lost and Found: The IRS is given two years in which to create an online database of qualified plans to find missing or forgotten plans and retirement accounts.

Roth Retirement Savings: Several provisions in the Act are intended to encourage saving for retirement through the use of Roth accounts.

Mandatory Roth Catch-up Contributions: [Section 603] As noted above, elective deferrals will be limited to regular contribution limits, such that 401(a) qualified plans, 403(b) plans sponsored by non-profits, and governmental plans under 457(b) that permit an eligible participant to make catch-up contributions must require such catch-up contributions to be designated as Roth contributions. This applies to eligible participants whose Roth account  for the preceding calendar year from the employer who sponsors the plan exceeds $145,000. This provision is effective starting in 2024. The $145,000 amount will be indexed for inflation. If the condition disqualifies a participant from the making the Roth contribution, he/she will still be able to contribute to a pre-tax retirement account. Note that this provision applies to all qualified plans, whether or not set-up with Roth contribution provisions. In other words, there is no ‘grandfathering’ for older, existing, qualified plans. There will need to be guidance from the IRS in Regulations during 2023 to help existing qualified plans navigate this new mandatory Roth catch-up  rule. This provision was included in the Act as an intentional revenue-raiser by Congress  to pay for some of the other tax ‘breaks’ created under the Act.

Employer Matches- Either Pre-or Post-Tax: [Section 604] The Act permits 401(k), 403(b) and 457(b) retirement plans to receive matching contributions on a Roth basis. Note, however, that plan sponsors are not required to offer this feature in their retirement plans; the Act only creates an option. This feature is effective in 2023. The intent behind this option is to benefit lower-income employees who do not benefit too much from income tax deferral with pre-tax retirement plan contributions, especially early in their careers. Accordingly, the Roth income tax treatment is intended to give these plan participants a better overall tax outcome.

Removal of RMD from Roth Accounts:  [Section 325] Beginning in 2024, Roth 401(k) accounts, or Roth 403(b) accounts will no longer be subject to predeath required minimum distributions (RMDs.) The current rule forced participants who owned Roth 401(k) or 403(b) accounts to do rollovers from their 401(k) or 403(b) accounts to a Roth IRA in order to avoid having to take an RMD. In short, a lot of paper was generated without any real benefit to the plan participant. Thus, this provision is intended to avoid forcing a Roth qualified plan participant to roll out from the qualified plan that sponsors the Roth 401(k) account to a Roth IRA and not be subject to lifetime RMDs. Note, however, that the Roth IRAs and Roth 401(k) accounts remain subject to the same rules pre-SECURE Act 2.0 once the Roth account owner has died.

SEP and SIMPLE Roth IRAs: [Section 601] Effective in 2023, SIMPLE IRAs will accept Roth employee contributions and will allow SEP IRAs to offer employees the ability to treat SEP contributions as Roth contributions. The SIMPLE or SEP employer plan will have to offer this Roth contribution feature;  it is not automatic. This enhancement is intended for ‘start-up’ employers who begin to sponsor retirement plans, especially for younger employees who are in lower marginal income tax brackets.

529 Accounts to Roth Accounts: [Section 126]  Effective in 2024, a rollover of up to $35,000 from a 529 account can be made to a Roth IRA. The $35,000 is a lifetime limit. The rollover would also be limited to the Roth IRA contribution limitation amount for the year of the rollover. Yet another condition is that the 529 account would have to have been open for at least 15 years. Earnings and contributions would be treated like any other Roth account rollover, but the income limitation on a Roth IRA contribution would be removed, but for the annual contribution limit. This provision means that an ‘overfunded’ 529 account could be repositioned back to the individual who created the 529 account or to the 529 beneficiary’s Roth IRA.

Conclusion: Clearly with all of the new Roth provisions in the SECURE Act 2.0, the intent of Congress is to push income tax revenues forward to assist Treasury to make the Act revenue neutral. This is particularly the case by mandating Roth treatment for catch-up contributions. With these new Roth provisions, the apparent goal of Congress is to give plan participants greater flexibility to choose between Roth accounts and tax-deferral accounts, thus giving those participants more control over how their retirement funds are taxes, more so than before the Act. Now, if I just had more confidence that Congress will not make further changes to the Roth rules with regard to tax-free income and no RMDs from Roth retirement accounts, considering that Congress back in 2019 with the original SECURE Act shortened the tax-free nature of inherited Roth accounts to only 10 years. So while Congress seems to be pushing Roth retirement savings, Congress can also take-away those same perceived benefits with Roth accounts.