A few years ago, congress passed the SECURE Act, which made some pretty sweeping changes to retirement accounts and related laws. This is generally a bipartisan issue – both parties want people to have enough money saved for retirement. When people run out of money in retirement, government programs (along with their wealthiest child) have to support them. Encouraging more retirement savings leaves more money for other government programs, so it’s really a no-brainer to legislate these things. SECURE 2.0 makes more favorable changes to retirement plans, and is arguably more significant than the first law. The bill is about 500 pages. Here are the most important things I was able to pull from it:
Changes to Auto-Enrollment: Beginning in 2025, employers will be required to auto-enroll new hires in their retirement plan and begin deferring at least 3% of their wages into the plan. Employees will have the chance to opt out of this. It’s meant to encourage participation among employees who are more passive about retirement savings. It will also include an annual 1% increase unless employees opt out, which can go as high as 15%. Small businesses and non-profits are going to be exempt from these requirements.
Emergency Withdrawals from Retirement Accounts: Starting in 2024, employees may be able to make one annual emergency withdrawal from their retirement accounts for emergency expenses. The withdrawal would be capped at $1,000 per year, and would avoid the 10% penalty on early withdrawals. The employee has the option to repay the distribution over a three-year period. If they don’t repay it, they will be prohibited from making another emergency withdrawal for three years.
Hardship Withdrawals: If a natural disaster occurs, plan participants can now withdraw up to $22,000 from their retirement accounts free of the 10% early withdrawal penalty. Aside from that, a new provision allows survivors of domestic violence to withdraw the lesser of $10,000 or 50% of their account balance after self-certifying that they have been a victim of domestic violence.
Increased Access for Part-Time Employees: Under prior laws, part-time employees would be able to gain access to employer retirement plans after having at least 500 hours in 3 calendar years. Now, that limit has been changed to 2 calendar years.
Incentives for Participation: Employers will now be able to offer incentives, such as low-dollar gift cards, to get their employees to participate in the plan. If a $10 Dunkin Donuts gift card doesn’t get you to save for retirement, I don’t know what will.
Higher Employer Matches to SIMPLE Accounts: Historically, employers have only been able to match 2-3% to their employees’ SIMPLE accounts. Starting in 2024, employers will be able to contribute the lesser of 10% of employee compensation or $5,000 to each employee’s account. This is optional for the employer, but is a great way to stay competitive with employers that offer more generous 401(k) plans.
Roth Options for SEPs & SIMPLEs: Generally, SEP’s and SIMPLE accounts offered by employers have all been pre-tax. Now, Roth accounts can be offered for both employee and employer contributions to both of these accounts. This is a very favorable change for small employers that offer these types of accounts.
There are a handful of other changes included in this law, but these are the main ones that impact individuals and small businesses. If you have questions about how these changes might impact your retirement plans, it’s a good idea to reach out to your financial advisor or plan administrator. Many of the changes take effect in 2024, so more information will become available as that approaches.