Following is a summary of key tax provisions in the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (SECURE 2.0 Act), enacted on December 29,2022, which was part of the Omnibus/Consolidated Appropriations Act.
Expanding Automatic Enrollment in Retirement Plans
The Act adds new Code Sec. 414A, which provides that an arrangement generally will not be treated as a Code Sec. 401(k) qualified cash or deferred arrangement or a 403(b) annuity contract unless it is an eligible automatic contribution arrangement and satisfies three additional requirements regarding withdrawals, automatic contributions, and investment of automatic contributions.
Automatic enrollment is not required for: (A) SIMPLE 401(k) plans; (B) plans established before the Act’s enactment date; (C) governmental plans ; church plans ; (D) any plan maintained by an employer in existence for less than 3 years ; and (E) any plan maintained by an employer that employs not more than 10 employees.
This provision is effective for plan years beginning after Dec. 31, 2024.
Modification of Credit for Small Employer Pension Plan Start-up Costs
The Act changes the small employer pension plan start-up cost credit by (i) providing that the credit is equal to the entire amount of creditable costs (qualified start-up costs) of an employer with 50 or fewer employees (up to an annual cap), (ii) allowing a credit amount for employer contributions to small employer pensions, and (iii) fixing a technical glitch pertaining to small employers who join multiemployer plans.
The amount of the credit allowed for employer contributions is reduced for employers with between 51 and 100 employees (inclusive). The reduction is equal to 2% multiplied by the number of employees is in excess of 50 multiplied by the amount of the credit.
No credit is allowed for employer contributions if the employer has more than 100 employees.
In addition, no credit is allowed for employer contributions on behalf of an employee who makes more than $100,000, adjusted for inflation in tax years beginning after 2023.
The credit amount for employer contributions is not available either for elective deferrals under Code Sec. 402(g)(3) or for contributions to a defined benefit plan under Code Sec. 414(j).
The Act changes the credit so it now has two portions, calculated separately: a qualified start-up cost portion available for the first three years of the plan’s existence and an employer-contribution portion, available for the first five years of the plan’s existence.
The above rules apply to tax years beginning after Dec. 31, 2022.
Multiemployer plans.
The Act also allows employers joining a multiple employer plan (MEP, which includes pooled employer plans) to take the portion of the SEP credit for qualified start-up costs for the first three years after they join an MEP, regardless of how long the MEP has been in existence.
The MEP rule is effective retroactively for tax years beginning after Dec. 31, 2019.
Increase in Age for Required Beginning Date for Mandatory Distributions (Required Minimum Distributions) from Retirement Plans
Under the Act, the current required age component used to determine required minimum distributions referred to as the “applicable age,” increases from age 72 to: (A) age 73 starting on Jan. 1, 2023 (for individuals who attain age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2033); and (B) age 75 starting on Jan. 1, 2033 (for individuals who attain age 74 after Dec. 31, 2032).
This provision applies to distributions required to be made after Dec. 31, 2022, with respect to individuals who attain age 72 after that date.
Higher Retirement Plan Catch-up Limit to Apply at Age 60, 61, 62, and 63
Starting in 2025, the Act increases the current catch-up limit (for defined contribution plan participants who are age 50 or older and want to make additional pre-tax elective deferrals, to the greater of $10,000 ($5,000 for SIMPLE plans) or 50% more than the regular catch-up amount in 2024 (2025 for SIMPLE plans) for individuals who attain ages 60, 61, 62 and 63. The statutory dollar amounts are indexed for inflation commencing in 2026.
This provision applies to tax years beginning after Dec. 31, 2024.
New Credit for Small Employers for When Military Spouses Start Their Participation in Employers’ Defined Contribution Plans
The Act adds a new tax credit for small employers (those with no more than 100 employees that earned at least $5,000 for the preceding year). The credit is for each military spouse that starts participating in an eligible defined contribution plan of the employer. Highly compensated employees are excluded from credit consideration.
The annual credit amount is (1) $200 for each military spouse who participates in the employer’s plan, plus (2) the amount of related employer contributions to the plan (but capped at $300 of contributions for any individual). A military spouse is counted for the credit only for the tax year which includes the date they begin participating in the plan and for the two succeeding tax years. Additionally, the Act provides safeguards for eligibility, and for employer contribution entitlement, that plans must satisfy to qualify for the credit.
The credit is available for tax years beginning after the date of enactment of the Act.
Penalty-Free Withdrawals from Retirement Plans – Certain Emergency Expenses
The Act provides an additional exception from the 10% penalty tax on distributions from tax-preferred retirement accounts for certain distributions used for unforeseeable or immediate financial needs relating to personal or family emergency expenses. Only one distribution, of up to $1,000, is allowed per year, and a taxpayer has the option to repay the distribution within three years. No further emergency distributions are permissible during the three-year repayment period unless repayment occurs.
The provision is effective for distributions made after Dec. 31, 2023.
Age Requirement for Qualified ABLE Programs Modified
States may establish tax-exempt ABLE programs to assist persons with disabilities. An individual who is disabled or blind may establish and become the designated beneficiary of an ABLE account under a state’s program. Under pre-Act law, the disability or blindness must have occurred before age 26.
The Act increases this age limit to 46, thus making more individuals eligible to establish an ABLE account. The amendment is effective for tax years beginning after Dec. 31, 2025.
Tax-free Rollovers From 529 Accounts to Roth IRAs Permitted
The Act permits beneficiaries of 529 college savings accounts to make direct trustee-to-trustee rollovers from a 529 account in their name to their Roth IRA without tax or penalty. This provides an option for 529 accounts that have a balance remaining after the beneficiary’s education is complete.
The 529 account must have been open for more than 15 years. The rollover can’t exceed the aggregate amount contributed to the account (and earnings thereon) more than five years before the rollover.
Aggregate rollovers under the provision can’t exceed $35,000 over the beneficiary’s lifetime. Rollovers are subject to the Roth IRA annual contribution limits, but the limit based on the taxpayer’s adjusted gross income is waived.
The amendments are effective for distributions after Dec. 31, 2023.
Reduction in Excise Tax on Certain Accumulations in Qualified Retirement Plans
The Act reduces the penalty for failure of a payee under any qualified retirement plan to take required minimum distributions (RMDs) from 50% to 25% (10% if the failure to take the RMD is corrected in a timely manner).
This provision applies to tax years beginning after the date of enactment of the Act.
Statute of Limitations on Assessment of Excise Tax on Excess Contributions to, and Certain Accumulations in, Individual Retirement Plans
The Act provides that the statute of limitations for the assessment of excise taxes due to excess contributions to tax-favored accounts and accumulations on qualified retirement plans begins to run on the filing of the taxpayer’s income tax return for the year of the violation. The limitations period is three years (six years in the case of excess contributions).
Therefore, the filing of the Form 5329 excise tax return by the private foundation, plan, trust, or other organization administering the plan is no longer required to start the statute of limitations.
If an individual is not required to file an income tax return for that year, the statute of limitations will nevertheless begin on the date the return was due.
This provision is effective as of the date of the enactment of the Act.
Elimination of Additional Tax on Corrective Distributions of Excess Contributions to an IRA
The Act specifically provides that earnings attributable to excess contributions to an IRA that are returned by the due date for the taxpayer’s return for the year (including extensions) are exempt from the 10% early withdrawal tax.
This provision applies to any determination of, or affecting, liability for taxes, interest, or penalties made on or after the date of the enactment of the Act, without regard to whether the act (or failure to act) on which the determination is based occurred before the date of enactment.
Elective Catch-Up Deferrals Generally Limited to Regular Contribution Limit
The Act provides that catch-up contributions under Code Sec. 401(k), Code Sec. 403(b), or Code Sec. 457(b) plans are subject to mandatory Roth tax treatment, except those made by participants whose wages for the preceding calendar year do not exceed $145,000, indexed for inflation. This rule does not apply to simplified employee pensions under Code Sec. 408(k), or to SIMPLE IRAs under Code Sec. 408(p).
This provision is effective for tax years beginning after Dec. 31, 2023.
Optional Treatment of Employer Matching or Nonelective Contributions as Roth Contributions
The Act allows a Code Sec. 401(a) qualified plan, a Code Sec. 403(b) plan, or a governmental Code Sec. 457(b) plan to permit a participant to designate some or all matching contributions and nonelective contributions to the plan as designated Roth contributions.
This provision applies to contributions made after the date of the enactment of the Act.