Compliance

Secure 2.0 Act

The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act of 2022 contains sweeping retirement plan changes. It was signed into law by President Biden on December 29, 2022, as part of the Consolidated Appropriations Act, 2023 [Pub. L. 117-328]. Many of the SECURE 2.0 Act changes will affect payroll for years to come. Here are some highlights of the payroll-related provisions.

Automatic Enrollment
Employers that establish a §401(k) plan after December 29, 2022, will be required to automatically enroll employees in the plan effective for plan years beginning after December 31, 2024. Eligible employees must be automatically enrolled at a rate of at least 3% but not more than 10% unless the employee specifically elects not to contribute or to contribute a different percentage. The percentage will increase annually by 1%, until it reaches at least 10%, but not more than 15%. Employers with 10 or fewer employees, government plans, church plans, and new employers in business for less than three years are not required to auto enroll employees.

Catch-up Limits
A higher catch-up limit is created for annual retirement contributions for individuals aged 60, 61, 62, and 63. The new catch-up limit is the greater of $10,000 or 50% more than the regular catch-up amount (applicable to those who have attained age 50). This provision is effective for tax years beginning after December 31, 2024, and the increased limit is indexed to inflation after 2025.

Catch-up Contributions for Highly Compensated Employees
Catch-up contributions from highly compensated employees (those whose wages in the preceding calendar year exceed $145,000, as adjusted for inflation beginning in 2025) must be treated as Roth contributions as opposed to pretax contributions. The effective date for this requirement is January 1, 2024. However, on August 25, 2023, the IRS announced a two-year administrative transition period. The means plan sponsors have until January 1, 2026, to comply with the new requirements. The IRS has also said it will provide more guidance on this provision of the SECURE 2.0 Act.

Roth Option for Employer Contributions
Effective December 29, 2022, plans may allow employees to elect to have employer contributions (matching or nonelective) be treated as Roth contributions.

Help for Smaller Employers
Effective for plan years beginning after December 31, 2022, the tax credit for small businesses (up to 50 employees) increases from 50% to 100% of the costs for establishing new plans and then the credit phases out over the next three years with the credit being reduced by 25% each year. An additional credit of up to $1,000 per employee for employers with up to 50 employees is also created. This credit is gradually phased out for employers with 51 to 100 employees.

Employer Matches for Student Loan Deferrals
Effective for tax years beginning after December 31, 2023, employers are allowed to make matching contributions to §401(k) plans on behalf of employees who are making qualified student loan payments instead of contributing to a retirement plan.

Expanded Eligibility for Part-time Employees
Effective for tax years beginning after December 31, 2024, part-time employees who work at least 500 hours per year for two years (previously three years) are eligible to contribute to a §401(k) plan.

Withdrawals for Certain Emergency Expenses
Generally, a 10% tax applies to early distributions from §401(k) plans. SECURE Act 2.0 provides an exception for distributions used for certain qualifying emergency expenses. Only one distribution may be made per year. The maximum distribution is $1,000 and may be repaid over the next three years. This provision is effective for distributions made after December 31, 2023.

Emergency Savings Accounts
Effective after December 31, 2023, emergency savings accounts may be created and included as part of a retirement plan. The savings accounts are available to non-highly compensated employees (for 2024, one who is not a 5% owner of the business or does not receive more than $150,000 in compensation in 2023). Contributions must be made on a Roth basis and are capped at $2,500 (subject to annual inflation adjustments). The funds must be available for withdrawal at least monthly.

Required Minimum Distributions (RMDs)
There are several changes to the rules for RMDs, including increasing the age at which distributions must be made. Effective in 2023, the age increases from 72 to 73 and is increased again in 2033 to age 75.

Steps Employers Should Take Now

The sweeping nature of the changes made by the SECURE 2.0 Act require substantial guidance from the IRS. On August 25, 2023, the IRS released its initial guidance on §603 of the Act. The guidance provides a two-year administrative transition period for the requirement that catch-up contributions from certain highly compensated employees be treated as designated Roth contributions. The IRS has also said that it is working to provide additional guidance on this and other provisions of the SECURE 2.0 Act.

As the IRS releases additional guidance, employers should work closely with their plan administrators and service providers to discuss whether plan modifications and changes to their payroll and accounting procedures are needed. Employers will also need to educate their affected employees about retirement plan changes. This will include informing highly compensated employees about the new Roth treatment of catch-up contributions.

PayrollOrg Resources

Government Resources