At the end of 2022, a new appropriations bill which contained the new SECURE 2.0 Act became Law. The Act is an expansion of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The legislation provides ninety-six changes that impact retirement plans, some taking years to fully implement. Today, I wanted to bring to your attention two that will impact plans immediately and change the design of future retirement plans.
While the original SECURE Act (passed at the end of 2019) raised the age at which retirees and owners must begin taking Required Minimum Distributions (RMDs) from age 70 ½ to age 72, SECURE 2.0 raises that age to 73 effective January 1, 2023. If a person turned 72 in 2022, they must take their first RMD by April 1, 2023. A person turning age 72 in 2023 has until April 1, 2025, to take their first RMD, the year after they attain age 73. Remember, when a retiree reaches the age at which they must begin taking RMDs, they can elect to take their first RMD in that year or defer until April 1st of the following year. If they defer the distribution until April 1st, they must take another RMD by the end of that year, for a total of two distributions. Eventually (by 2033), the age at which the RMDs begin will increase to age 75. Owners and certain family members are still required to take an RMD at their required beginning date, even if they continue to work, while non-owners have until they separate from service.
Another change brought on by SECURE 2.0 is the requirement that 401(k) and 403(b) plans feature automatic enrollment for employees of companies that sponsor such plans. Starting with plan years beginning after December 31, 2024, plan sponsors must provide for automatic enrollment into their plans starting at a contribution rate of at least 3% of earnings. In addition, plans must also include automatic escalations of the amount of deferral by participants. The escalator must increase annually by 1% up to at least 10% but not more than 15% of the employee’s pay. Employees can affirmatively elect a different contribution, or opt out entirely, but new plans must include these features.
While this new requirement may concern plan sponsors, there are quite a few exceptions which effectively make the automatic enrollment feature only apply to new plans of larger entities. As written, SECURE 2.0 impacts only new plans that start on or after January 1, 2025. Further, the law exempts plans sponsored by small businesses with 10 or fewer employees, new businesses less than 3-years-old, churches and church related entities, and governmental entity plans.
So, while automatic enrollment has been gaining ground in the retirement plan world, many plan sponsors in the small plan market have not implemented them, and they may not be subject to these new rules. Plans that have trouble passing discrimination testing may want to add an automatic enrollment feature to increase participation even if not required to offer it under SECURE 2.0. Alternatively, plans may be designed to automatically enroll participants at 10%. Most participants will either opt out, affirmatively elect a lower percentage, or remain in at 10%, relieving the Sponsor of the burden of auto-escalation.
Obviously, both changes will require amended language to the Plan Document, as well as modifications to some investment platforms. We are still waiting on final regulations to clarify these points. EJReynolds will continue to update you as more guidance is issued regarding these and other aspects of the SECURE Act 2.0. If you have any questions about these, or any portion of SECURE 2.0, please contact your EJReynolds’ plan consultant.