The 2019 legislation included changes that affected traditional 401(k)s and IRAs, such as expanded eligibility for opening a Roth IRA, new requirements for minimum distributions from retirement accounts, and incentives for small businesses to offer retirement plans. The law also included provisions to benefit those who are retired or disabled, such as increasing the age at which a person must begin taking required minimum distributions from 70.5 to 72.

The commonly referred to SECURE 2.0 Act (the Consolidated Appropriations Act of 2023 / HR 2617) was signed into law on December 29, 2022. The SECURE Act 2.0 ("The Act") bolsters the benefits offered in 2019's version, making it more enticing for employers to provide retirement plans and improve employees' retirement prospects along the way. 

We've summarized some of the provisions, but keep in mind that The Act includes over 90 provisions that potentially affect retirement savings plans. 

Mandatory Automatic Enrollment

Effective for plans beginning after December 31, 2024, new 401(k) and 403(b) plans must automatically enroll employees when eligible. Automatic deferrals start at between 3% and 10% of compensation, increasing by 1% each year, to a maximum of at least 10%, but no more than 15% of compensation. Participants can still opt out.

Automatic Escalation

Beginning in 2025, for new retirement plans started after December 29, 2022, contribution percentages must automatically increase by one percent on the first day of each plan year following the completion of a year of service until the contribution reaches at least 10%, but no more than 15%, of eligible wages. Governmental organizations, churches, and businesses with 10 employees or less as well as employers in business for three years or fewer are exempt from this policy.

Expanded Eligibility for Long-Term, Part-Time Employees

Under current law, employees with at least 1,000 hours of service in a 12-month period or 500 service hours in a three-consecutive-year period must be eligible to participate in the employer’s qualified retirement plan. SECURE 2.0 reduces that three-year rule to two years for plan years beginning after December 31, 2024. 

Increase in Catch-Up Limits

Effective after tax year 2024, SECURE 2.0 provides a notable rise in the amount of contributions for those aged between 60 to 63. Generally, the additional catch-up limit for most plans is $10,000 and only $5,000 for SIMPLE plans. These amounts are subject to inflation adjustment just like the normal catch-up contributions.

Furthermore, those over 50 years of age are eligible for increased contribution limits on their retirement plans (known as “catch-up contributions”). For 2023, the maximum catch-up contribution amount has been set to $7,500 for most retirement plans and will be subject to inflation adjustments.

Rothification of Catch-Up Contributions for High Earners

For plans that permit catch-up contribution, and are being made by a High earners ($145,000 in paid wages from the employer sponsoring the plan the preceding year, indexed to inflation) can no longer enjoy the privilege of tax-deferred catch-up contributions as their contribution need to be characterized as designated Roth contributions 

Treatment of Student Loan Payments for Matching Contributions

Starting in 2024, student loan payments can be treated as part of your retirement contribution to qualify for employer-matched contributions in a workplace retirement account. Employers will have the flexibility to provide contributions to their retirement plan for employees who are paying off student loans instead of saving for retirement.

Emergency Savings Accounts

Starting in 2024, retirement plans will have the option of providing "emergency savings accounts" which allow non-high paid employees to make after-tax Roth contributions to a savings account within their own retirement plan. Employers may automatically opt employees into these accounts at no more than three percent of eligible wages. Employees can opt out of participation. No further contributions can be made if the savings account has reached $2,500 (indexed), or a lesser limit established by the employer. The Department of Labor and/or the Treasury Department may issue guidance on these provisions.

Withdrawals for Certain Emergency Expenses

Penalty-free distributions are allowed for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses” up to $1,000. Only 1 distribution may be made every 3 years or one per year if the distribution is repaid within three years. Penalty-free withdrawals are also allowed for small amounts for individuals who need the funds in cases of domestic abuse or terminal illness.

Federal Contribution Match

Starting in 2027, low-income employees can gain access to a federal matching contribution of up to $2,000 each year that will be deposited into their retirement savings account. The matching contribution is 50 percent of the contributions, but it decreases according to income. For example, married taxpayers filing jointly between $41,000 and $71,000 and single taxpayers between $20,500-$35500.

Required Minimum Distributions (RMDs)

Beginning January 1, 2023, the age for required minimum distribution from an IRA is increased to the age 73. Starting in 2033, the RMD age will be 75. (IRA owners turning age 72 in 2023 would not be required to take RMDs in 2023.) Furthermore, the penalty for not taking your RMD has been decreased from 50% of what was required to be withdrawn to 25%, and even further down to 10% if corrected within two years.

Facilitation of Error Corrections

The Act expands the self-corrections system, allowing more types of errors to be fixed internally without having to amend returns in the Employee Plans Compliance Resolution System.

Immediate Incentives for Participation

At this moment, employers use matching contributions as a means to motivate employees to save for their retirement. Beginning in 2023, employers can incentivize employees with gifts cards or other small monetary rewards to increase engagement, although any financial rewards should be small and cannot come from retirement plan assets.

In summary, the SECURE Act 2.0 provides many new benefits and opportunities to save for retirement. It allows employers to offer more flexible contributions and encourages employees with incentives to become engaged in their own financial health. With reduced penalties and expanded self-correction rules, this act gives Americans more control over their retirement savings, allowing them to become better prepared for their future. As always, it's important to consult with your advisor for advice as guidance and changes to provisions are expected, and everyone's situation is unique.