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SECURE 2.0 Act: Retirement plan provisions

Feb 14, 2023

The SECURE 2.0 Act passed on December 29, 2022, providing updates on retirement plan taxes that impact both individuals and businesses.

The updated act includes changes to retirement plan rules for smaller businesses, how much employers can contribute to retirement accounts and the benefits employers receive for their contribution.

Here are the important SECURE 2.0 Act changes that you need to know:

Optional treatment of employer matching or nonelective contributions as ROTH contributions

Effective: Contributions made after December 29, 2022

Under current law, employers cannot make ROTH matching or nonelective contributions to 401(k), 403(b) and governmental 457(b) plans. SECURE 2.0 will begin to allow these contributions to be made as a ROTH at the election of the employee. Such payments must be fully vested, and the payment will be included in the employee’s gross income.

Multiple employer 403(b) plans

Effective: Plan years beginning after December 31, 2022

Organizations such as charities, nonprofits and educational institutions can set up a multiple employer plan for 403(b) plans. They will also receive relief from the one bad apple rule, so that violations from one employer do not affect the tax treatment of employees of compliant employers.

Expanding automatic enrollment in retirement plans

Effective: Plan years beginning after December 31, 2024

The addition of Code Section 414(a) adds the new requirement that plans with a qualified cash or deferred arrangement, 401(k), and salary reduction agreements, 403(b), must follow this code section.

The first hurdle is 414(w)(3). In short, this section states:

  • A participant can elect to have the employer make payments to the plan on their behalf.
  • The participant elects to have a uniform percentage of compensation contributed to the plan until they elect to stop or change that amount.
  • The plan administrator provides notice to the participant within a reasonable period of time before each plan year.

The plan must also follow these rules under 414(a):

  1. Withdrawals: Employees can make permissible withdrawals from the plan no later than 90 days after the date of the first elective contribution for that employee.
  2. Minimum contribution rules: The plan contribution is no less than 3% and not more than 10% of the employee’s compensation, unless the employee elects to have a different percentage used, including zero. Each plan year, the minimum contribution is increased by 1%. These increases continue each year until at least 10% or as much as 15% is being contributed each year. Certain plan years ending before January 1, 2025, will have the ceiling amount fixed at 10% instead of 15%.
  3. Investing funds: If the participant does not make an election for how their contributions should be invested, then the plan must invest the funds in accordance with section 2550.404c-5 of Title 29, Code of Federal Regulations.

Plans that are exempt from this provision include:

  • Any savings incentive match plan for employees (SIMPLE) under 401(k)(11).
  • Any qualified cash or deferred arrangement established before December 29, 2022.
  • Any annuity contract purchased under a plan established before December 29, 2022.
  • Any governmental plan under 414(d).
  • Any church plan under 414(e).

New businesses will have a three-year grace period for automatic enrollment starting from the date the business started.

Small business employers that normally have 10 or fewer employees are also exempt. However, they will need to comply with these rules no earlier than one year after the close of the first taxable year that they have more than 10 employees. For example, if a company has nine employees in 2025, but 11 normally in 2026, their compliance deadline would be January 1, 2028.

A multiple employer plan applies the new business and small business employer exceptions above, separately for each employer. All employers that do not meet either of the exceptions will be treated as maintaining a single plan.

Allow additional nonelective contributions to SIMPLE plans and contribution limit changes

Effective: Taxable years beginning after December 31, 2023

Employers may contribute additional funds in excess of the match requirements to a participant’s SIMPLE plan. These payments can be made so long as they do not exceed the lesser of 10% of compensation or $5,000 (indexed).

Additionally, the act increases the annual limit and catch-up contribution at age 50 by 10%. This is compared to the limit that would otherwise apply in the first year this change is effective, in the case of an employer with no more than 25 employees.

An employer with 26 to 100 employees would be permitted to provide higher deferral limits, but only if the employer either provides a 4% matching contribution or a 3% employer contribution.

Catch-up contributions for highly compensated employees

Effective: Taxable years beginning after December 31, 2023

Catch-up contributions to a plan established under 401(k), (403(b) or 457(b) are subject to mandatory ROTH tax treatment if the employee’s wages for the previous calendar year are in excess of $145,000 (indexed).

If a plan does not currently offer a ROTH option, they will now be required to update to include that option if they have qualifying employees.

How Wipfli can help

Wipfli understands retirement plan tax strategies. We’re ready to support both individuals and businesses as they navigate the complexities of the SECURE 2.0 Act.

Our tax team can help you identify how you can maximize your retirement plan with these new changes and our human capital management consultants are ready to help you establish retirement plans that benefit both you and your employees.

Contact us today to find out more.

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Author(s)

Michael J. Santo, CPA
Senior Tax Manager
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