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 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 3 years are not required to auto enroll employees.

Catch-Up Contributions for Highly Compensated Employees
Section 603 of SECURE 2.0 requires that additional elective deferrals (catch-up contributions) made by higher-income participants in §401(k), §403(b), or §457(b) retirement plans be designated as after-tax Roth contributions. The provision applies to highly compensated employees (HCEs) whose prior-year social security wages exceed the HCE threshold. The provision was set to take effect on January 1, 2024, but the IRS provided an administrative transition period that allows employers until January 1, 2026, to fully implement the new requirements.

Catch-Up Limits
SECURE 2.0 creates a higher catch-up limit for annual retirement contributions to an applicable employer plan other than a plan described in §§401(k)(11) or 408(p) for individuals aged 60, 61, 62, and 63. The new catch-up limit is the greater of $10,000 (indexed for inflation; $11,250 for 2025) or 50% more than the regular catch-up amount (applicable to those who have attained age 50).

Catch-up contributions to an applicable employer plan described in §§401(k)(11) or 408(p) that applies for individuals who attain age 60, 61, 62, or 63 in 2025 is $5,250.

Both of these provisions are effective for tax years beginning after December 31, 2024.

De Minimis Financial Incentives
SECURE 2.0 made changes to encourage employees to contribute to their employers' §401(k) or §403(b) plans. Section 113 allows employers to offer small financial incentives of less than $250 to employees who choose to participate in the plans. These incentives are not matching contributions. If an employer offers incentives, they are considered part of employees' income and are subject to regular tax withholding unless there is a specific exemption.

Disaster Relief
The IRS issued Fact Sheet 2024-19, which contains FAQs about the rules for distributions from retirement plans and individual retirement arrangements (IRAs) and for retirement plan loans for individuals impacted by federally declared major disasters. The FAQs relate to the SECURE 2.0 provision that provides for ongoing disaster relief for certain distributions and loans in the case of federally declared major disasters. Before SECURE 2.0, disaster relief was enacted by Congress on a disaster-by-disaster or yearly basis.

Emergency Expenses
Generally, a 10% tax applies to early distributions from §401(k) plans. SECURE 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 3 years. This provision is effective for distributions made after December 31, 2023.

Emergency Savings Accounts
Effective after December 31, 2023, pension-linked emergency savings accounts (PLESAs) may be created and included as part of a retirement plan. Employers may automatically enroll employees into PLESAs, make employee contributions to PLESAs through payroll deductions, and make matching employer contributions to linked retirement plans. Participating employees can withdraw funds saved in their PLESAs without incurring the penalties of withdrawing from retirement savings.

PLESAs are available to non-highly compensated employees. 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.

Long-term, Part-time (LTPT) Employees
Effective for tax years beginning after December 31, 2026, LTPT employees who work at least 500 hours per year for 2 years (previously 3 years) are eligible to contribute to §401(k) plans. In October, the IRS released Notice 2024-73, which provides guidance on the application of nondiscrimination rules with respect to LTPT employees under a §403(b) plan. The guidance is effective beginning in 2025.

Optional Treatment of Employer Nonelective or Matching Contributions as Roth Contributions
Section 604 allows employees to designate certain matching and nonelective contributions made after December 29, 2022, as Roth contributions, which generally are not subject to withholding for federal income tax, social security, or Medicare taxes.

Qualified Student Loan Payments (QSLPs)
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 QSLPs instead of contributing to a retirement plan. The provision is also available for §403(b), SIMPLE IRA, and §457(b) plans.

Required Minimum Distributions
There are several changes to the rules for required minimum distributions, including increasing the age at which distributions must be made. In the case of an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033, the applicable age is 73. In the case of an individual who attains age 74 after December 31, 2032, the applicable age is 75.

Roth Option for Employer Contributions
Effective December 29, 2022, employers that maintain a Savings Incentive Match Plan for Employees (SIMPLE) and/or Simplified Employee Pension (SEP) IRA plan may offer participating employees the option of having their salary reduction contributions deposited in a Roth IRA instead of a traditional IRA. These employee-designated Roth elective contributions made to a Roth SIMPLE or Roth SEP IRA are subject to federal income tax withholding, Federal Insurance Contributions Act (FICA), and Federal Unemployment Tax Act (FUTA).

Small Employer Tax Credit
Effective for plan years beginning after December 31, 2022, SECURE 2.0 increases the tax credit for small businesses (up to 50 employees) from 50% to 100% of costs for establishing new plans and then phases out over the next 3 years with the credit being reduced by 25% each year. Employers with 50 employees receive the full credit, and the credit is gradually phased out for employers with 51 to 100 employees. The SECURE 2.0 Act also created an additional credit of up to $1,000 per employee for employers with up to 50 employees is also available.

Steps Employers Should Take
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 employees about retirement plan changes.

Watch for Reporting on Forms W-2
Throughout 2024, the IRS has reminded employers that adopted certain parts of the SECURE 2.0 Act that some provisions may affect reporting on 2024 Forms W-2, Wage and Tax Statement. The IRS created two fact sheets on the topic so far, and more information about reporting requirements is available in the 2024 General Instructions for Forms W-2 and W-3 and 2024 Instructions for Forms 1099-R and 5498.

Government Resources

  • IRS Notice 2024-73, Guidance on issues related to the application of the nondiscrimination rules of §403(b)(12) with respect to the ERISA long-term, part-time employee rules for a §403(b) plan.
  • IRS Notice 2024-63, Guidance on §110 of the SECURE 2.0 Act, which allows employers to make matching contributions on account of employees' qualified student loan payments under certain defined contribution retirement plans.
  • IRS Notice 2024-55, Guidance on exceptions to the 10% additional tax when an employee takes a retirement plan distribution either for emergency personal expenses or as a victim of domestic abuse.
  • IRS Notice 2024-2, Guidance on miscellaneous changes under the SECURE 2.0 Act in a question-and-answer format.
  • FS-2024-29 and FS-2024-18, Reminds employers that SECURE 2.0 changes affect how businesses complete Forms W-2.
  • FS-2024-19, FAQs about the rules for distributions from retirement plans, individual retirement arrangements, and retirement plan loans for individuals impacted by federally declared major disasters.
  • IRS Notice 2023-62, Guidance on Section 603 of the SECURE 2.0 Act With Respect to Catch-Up Contributions.
  • Section-by-Section Summary of the SECURE 2.0 Act of 2022, U.S. Senate Committee on Finance.
  • The Consolidated Appropriations Act, 2023, Pub. L. 117-328: The Secure 2.0 Act is included as Division T of the CAA.