There are numerous opportunities for retirement investors and retirement plan sponsors in the new law. In this article, we’ll discuss some of the newly created advantages and we’ll try to provide useful insights on how the changes can be applied.
More Americans can participate
New plan creation is being encouraged and financed by new tax credits that may offset 100% of administrative costs for new plans sponsored by employers with up to 50 employees — that’s up from a 50% credit prior. This should spur new plan creation at newer and smaller businesses with the point being: Start sooner, save longer. Beginning in 2024, there will also be a “Starter Plan” provision that creates a simpler, easier-to-implement version of both 401(k) and 403(b) plans. The credits apply for the first three years of the plan.
Along the lines of “save longer,” Required Minimum Distribution (RMD) beginning dates are being pushed out even further from age 72, as provided for in Secure 1.0, to age 75. The changes will be gradual, pushing the required beginning date out over time. RMDs for Roth 401(k) and Roth 403(b) accounts are eliminated after 2023, again allowing more money to grow without tax longer.
More than just a “nudge,” the Feds understand the power of automatic features in plan design, so all new plans created after 2024 must have automatic enrollment at 3% or greater. There is a theme here: Start plans sooner, enroll people at younger ages, allow them to save more, and let it compound longer or, in the case of Roth, for life.
On the “save more” note, contribution limits went up significantly from 2022 to 2023, as well as catch-up limits. Secure 2.0 jumped on that bandwagon by adding an age 60-63 special catch-up of $10,000 per year (beginning in 2025). Retirement plan Roth options were shown some love: Employer matching can now be taken in Roth form for the first time. Providers haven’t figured this out just yet, but this will be available this year provided payroll and plan providers can navigate the system updates in time. Additionally, earners making $145K or more must make any catch-up contributions into Roth accounts within the plan. This will require amendments to plans that offer catch-up but not Roth since the Roth feature will be needed to accommodate the catch-up.
Consideration for the high cost of college
Another change that promotes saving for retirement earlier in life is a new provision that allows employers to “match” student loan payments. This means younger employees that might have been prevented from participating in an employer sponsored plan due the fact that student loan servicing was absorbing all their potential savings will no longer be “leaving employer money on the table.” The employer match will go into the retirement plan and not toward the student loans themselves.
College savings with a retirement plan “relief valve”: Excess accumulations in 529 accounts can now be transferred–tax free–to the beneficiary’s Roth IRA. Transfers are subject to the regular annual Roth limits ($6,500 for 2023) and a lifetime max of $35K. This means overfunding a 529 is even less of a big deal and may turn out to be something that you actually want to do as a planning tool, especially for those that are confident they wouldn’t otherwise be eligible for any financial aid.
Additional benefits
In an effort to reduce “plan leakage,” a side-car emergency savings vehicle has been approved so participants can contribute up to $2,500 to a principal protected account that is accessible for emergencies. This will be in a Roth format, and we’ll need additional regulatory guidance for further comment. Qualified Longevity Annuity Contracts (QLACs), for guaranteed income accounts in-plan also got a boost, with the limit increasing from $145K to $200K and the previous 25% of plan balance limit now removed (2023).
Employees of non-profit organizations, where the typical plan type is 403(b), got a little something but not the big one we were hoping for. 403(b) plans can now join MEPs and PEPs, which are multiple employer plans that may provide opportunities to create economies of scale, even for smaller non-profits. The significant one we were hoping for, that did not make it into the final form of the bill (really due to a technicality) was access to Collective Investment Trusts (CITs). While Secure 2.0 addressed this, it failed to address other federal regulations that prevent it from being implemented. Bottom line is that retirement savers that work at non-profits deserve to have the same array of tools available to them that for-profit employees have, and they don’t. Call your Congressperson!
Overall, Secure 2.0 contains a series of very positive changes for the American retirement investor. This regulatory framework is more supportive of new plan creation, saving earlier in one’s career, saving more, and letting the money grow until later in life. Some benefits are available, at least in theory, immediately, while a number will be effective over the next couple of years. A thorough review is in order to make sure you understand the changes and how you can apply them to your own circumstances. If you sponsor a retirement plan, or would like to, we would welcome the opportunity to partner with you on that endeavor.
By MoneyLetter staff
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